Small Cap Value Report (9 Jul 2015) - Budget, PLUS, GOAL

Good morning!

There's been a big rebound (about 10%) in the Chinese stock market overnight, although whether it can be considered a fair market is open to question, since the Govt has banned major shareholders from selling their shares for the next 6 months. As with everything in China, it's best to assume that it's not capitalism as we understand it in the West.

I get the feeling that the market crash in China was beginning to affect confidence in Western stock markets, but who knows? Sometimes people look for any excuse to sell positions after a long bull run.

Yesterday's Budget from Mr Osborne was radical, and contained some big changes. There are plenty of Budget reviews online, so I won't replicate that, but my initial thoughts for how it might affect shares/investors are:

Housebuilders & estate agents shares took a knock of about 5% last night - perhaps the future reduction in BTL interest relief, and tightening of Non-Dom status might reduce demand for property?

A big rise in Minimum Wage to £9/hr by 2020 is surely to be welcomed, in terms of making society a little fairer, I think so anyway. Yes, smaller businesses will perhaps struggle, but the £9 rate only applies to over 25s. They will still be able to pay lower wages to younger people. I think the macro effects will be very positive, as the low paid tend to spend all their income, and very fast, so it will boost overall demand in the economy well I think - so the gainers will generally be retailers, in terms of increased sales.

The losers will also include sectors where a lot of staff are paid Minimum Wage - so retailers, hospitality, and the care sector, spring to mind. So it will be interesting to see how the gains and losses will compare for retailers - will they be net losers or gainers? I think they will gain from lower staff turnover, from paying staff a decent wage, and staff feeling more motivated to give decent customer service too, so overall it gets a big thumbs up from me.

What else? The phasing out of the bank levy, and introduction of an 8% Corp Tax surcharge seems a good idea to me, as banks should pay more for the State guarantee which props them up when needed. I see that shares in challenger bank Aldermore (LON:ALD) were hit hard, but the major banks don't seem to have been affected much. (disclosure: I bought a few Aldermore shares on the sharp drop).

The self-employed who operate through a personal service limited company seem likely to be hit hard by increased taxation, due to the changes in how dividends will be treated. Even though it will affect me adversely, I think it's a move which is fair - the self-employed generally pay a lot less tax than people on PAYE, which is wrong.

I see that shares in Drax (LON:DRX) were hit very hard yesterday, down about 25%, due to changes in taxation relating to renewable energy I think, not sure as I glaze over at any mention of renewables.

Generally I feel that the big shift in emphasis from low to higher wages, beginning to slay the monster of Tax Credits (as described by Labour's own Welfare supremo, Frank Field) which Gordon Brown created, and further increases in the tax-free personal allowance, is definitely the right direction of travel, to create an economy with less extreme/unfair income inequality. Also it is surely only logical to let people keep more of their own money, instead of the status quo where people are taxed to oblivion, and then too poor to stand on their own feet, so have to apply back to the Govt for an income top-up! How ridiculous, only Socialists could dream up such a warped system, as of course they want everyone to feel dependent on the State, so that we vote for them!

A lot of the other moves, such as removing financial incentives for people to breed like rabbits, also gets a big thumbs up from me.

READER SURVEY - I've set up a quick reader survey, with only 3 questions on what you think about China, Greece, and the Budget - should only take a few seconds to complete. So let me know your responses - click here.

(Drat, sorry only just realised that SurveyMonkey only allows 100 responses, I have to pay £299 to upgrade for 1,000 responses, what a nuisance. So apologies if you're not able to log a response. Does anyone else know a better survey solution, as I like the idea of doing more reader polls, but don't want a limit on no. of responses in future? If so, pls let me know in the comments below).

EDIT: trying out Google Forms - please see if this new survey works:

<iframe src="https://docs.google.com/forms/d/1qAgIWh0OfNa0xXG3gnQfMip44YdZgGLPzwyneMBJCq0/viewform?embedded=true" width="760" height="500" frameborder="0" marginheight="0" marginwidth="0">Loading...</iframe>

Plus500 (LON:PLUS)

Trading update - my general impression from reading this update is that this controversial CFD provider seems to be getting back on track, after the serious regulatory problems which it ran into earlier this year.

Although risks persist, as the company today says, "The Plus500 Group continues to be the subject of a high level of regulatory scrutiny".

On outlook the company says;

My opinion - it seems to me that the disaster scenario predicted by bears is now receding, so the 400p agreed takeover bid (which the company describes as a merger today!) seems likely to go through now. There's also the possibility that the bid might be improved, with a higher price.

For these reasons, I thought it best to close my short position on this share this morning, as risk:reward seems to be moving in favour of the bulls. Of course, there is still a risk that the 400p takeover bid might fall through, so it's not a share I would want to be long of either.

Goals Soccer Centres (LON:GOAL)

Trading update - for H1 of 2015. The shares are down 5% to 205p, so this has clearly not impressed.

UK LFL sales from 46 sites are not great, down 2%. However, the one US site has delivered a barn-storming 20% LFL sales growth, "reinforcing confidence" for their planned US roll-out.

Valuation - EPS is forecast at 16.1p for this year, and 18.1p for next year. It sounds as if they are trading slightly below forecast, and of course you have to factor in a significant level of debt. So the PER of 12.7 times this year isn't as cheap as it looks, once you adjust for debt.

My opinion - it's a very slow roll-out here, which I suppose is only to be expected from large sites which need planning permission, etc. So I've never been comfortable with the previously quite toppy rating here. Also, the new player App doesn't seem to have made much difference, with LFL sales in the main UK market slightly negative.

However, below 200p per share, I think it might start to look interesting, so it's a stock I will put back on my watch list.

Sorry, run out of time this morning, as I have to drive up to Reading for an investor lunch now. If anything interesting happens during the day, I'll update this article this evening.

Have a good day!

Regards, Paul.