Small Cap Value Report (Fri 1 July 2022) - UBG, MYSL, REAT, XPF

30th Jun '22 by Paul Scott

68 comments 6526 reads

Good evening/morning, it's just Paul here for Friday (Graham does Mon-Thu). Today's report is now finished. Enjoy the weekend everyone!

Congratulations to Simon Thompson for winning Journalist of the Year at the Small Cap Awards last night (run by Master Investor). He normally wins it most years. Still, it was nice that I was included as one of the 5 nominees.

I had a good chat with Unbound (LON:UBG) (I hold) yesterday afternoon, and have typed up the key points below.

Agenda -

From yesterday - my notes from a call with the Unbound (LON:UBG) (I hold), to clarify some reader questions & misunderstandings.

UPDATE at 11:22 - There wasn't anything interesting on the RNS today, so I've had a lazy morning, and will now look back at React (LON:REAT) ad XP Factory (LON:XPF) updates from earlier this week. Sections should be up by 3pm.

Mysale (LON:MYSL) [No section below] - this has come up on the top % risers today, up almost 200% (from a very low base of 1.25p). The excitement seems to be due to Mike Ashley's Frasers (LON:FRAS) emerging with a new 28.5% stake. He must have taken several of the major shareholders, maybe including Philip Green's 16.3% stake? Or if it's someone else, then Green, Ashley, and Schroders would together hold a controlling 59.7%. We saw what happened at Studio Retail when Ashley & Schroders teamed up - they bought it for a quid, and other shareholders got wiped out. For that reason, I wouldn't touch MYSL. It's a rubbish business too, which never lived up to the promises, and is now in decline & loss-making. I wouldn't bank on the founding Jackson brothers being able to hold off the vultures. Still, if it all goes wrong for them, the Jacksons could just blame it on the boogie! ;-)

React (LON:REAT) - Interims look uninspiring (around breakeven), but a recent acquisition should transform future results, as it's a high margin window-cleaning business. I was expecting to dismiss this share again, but on closer inspection there might be some potential here, if more good acquisitions can be made. The problem is that equity is on a low rating, so each acquisition is likely to require considerable further dilution - so EPS could remain depressed.

XP Factory (LON:XPF) -…

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TheFloatingInvestor

1st Jul '22

I note that some very large buys have gone through Team17 (LON:TM17) late on in the session, circa 1,000,000 shares total.

Not sure what's going on their, if anyone can shed any light, perhaps changing hands with large share holders.

Update: I had a flick through the history and large volume trades are not that unusual. Must attract some wealthy folks!

Boon

I thought Mysale (LON:MYSL) had planned to delist from the LSE and transfer to the ASX? What happened to that?

yiannos1

The sharp fall of the markets , in general ,has nothing to do with inflation or the rise of interest rates.

In the 1970s inflation rose over 150% ( yes 150% ) but the market doubled.

In the 1980s inflation rose over 65% but the FTSE 100 was 400% up.

The markets have fallen because valuations were very very high , and liquidity ( as markets are falling ) dries up. Obviously, as markets and share prices were so high , profit warnings started to emerge as management expectations were way too high and thus the collapse of so many small caps.

However, in my opinion, I believe that there is limited downside at these levels for a lot of small caps.

Have all a nice weekend.

Regards

Yiannos

Paul Scott

RichardK,

Re Electra, Outbound and Hostmore - a good rule of thumb is never buy what private equity is selling.

Electra didn't sell Unbound & Hostmore. They separated the companies, and swapped Electra shares for the individual shares in both companies.

So whilst I agree with your general comment about private equity, it's not actually relevant here.

Regards, Paul.

Lochinver

Im guessing many shareholders have lost confidence in the company and founder long ago with appalling staff relations and more recently the owner taking more free shares to dilute existing shareholders. But share price at a shocking low for what should be an attractive sector could well be attracting gamblers.

cmpeckham

"The sharp fall of the markets , in general ,has nothing to do with inflation or the rise of interest rates."

Yikes!!!??! Yiannos, sorry but you're just wrong here. You're not going to believe me so I'd suggest either doing the analysis yourself (using short term e.g. monthly or quarterly, not decadal returns!) or look at some of the research e.g. this relatively readable paper from the IMF which summarises the evidence and includes some discussion of the difference between the short and long term impact:

https://www.imf.org/-/media/Fi...

Quote: "Equity shares ... do not prove to be a good hedge against inflation risk as researchers find a negative correlation between real stock return and inflation in the short run in developed countries."

As far as your theory that it's all down to valuation, again sorry, but valuation is irrelevant to short term stock market performance There is no correlation whatsoever between valuation and short term returns. When the market is highly valued sometimes you have a great year and sometimes you don't: other factors determine that. Only if you look at returns over periods of 5-10 years+ does value start to predict returns. Again, do the analysis yourself or look at some research. There are probably better papers out there but here is one based on the popular CAPE valuation methodology:

https://www.brandes.com/docs/d...

Quote: "it’s impossible to predict the stock market return over the next 12 months based on valuation factors."

Richard Goodwin

Historically growth at £capd has been cash consuming rather than cash generating. MSA Labs and the investment portfolio may make some difference this time round but....

Bouden54

Completely wrong about the 1970s - that was an utterly disastrous period for stock markets. In real terms most stock markets lost more than half of their value, with the UK market being particularly woeful. Don't have the precise figures in front of me, but it was certainly the worst period for stocks since the war. That said, there were pockets of the market that did quite well - Buffett unsurprisingly made some very good gains on deep value names.

I think you should do some research about the FTSE 100 in the 1970s and 1980s

This comment has been moderated

Wimbledonsprinter

I don't think the $70m Profit after tax you mention for Capital (LON:CAPD) in 2021 is that meaningful. Capital runs a significant portfolio of junior miners, where gains/ losses in their value run through the P/L. In 2021, $34m of "profit" came from marking up the value of holdings (particularly, PDI and Firefinch). So that I calculate real underlying profit after tax at $36m in 2021 ($12m in H1 and $24m in H2). It will be interesting to see if Capital can keep up with H2's underlying profit level - given the still strong market for rigs despite maybe slightly weakening ARPOR.

Looking at the share prices of Firefinch (particularly after the spin off of Leo Lithium) and of PDI (as well as some of the smaller holdings) I would fully expect the investment portfolio to show a substantial loss in H1 2022 - so I am assuming that actual profit after tax (inc investments), will be well down on 2021 levels. When you look at the brokers' forecasts, you need to understand if their profit forecast is pre or post the investment line. (For example, I think Tamesis generally strip out the investment income).

The MSALABS growth story has been impressive, despite it not having any exclusivity to Chrysos's PhotonAssay units, which seem key to its growth. Capital own 75% of MSALABS - so the minority interest needs to be taken into account in valuing this business.

Despite the above which temper the upside at below 80p, I agree the shares offer value.

Sorry but I beg to differ. The 1970s were horrendous for investors. As your numbers show end1979 FTSE stood at 488 (up 56% on its level of 313.16 at the start of the decade). There would have been dividends on top of this. But inflation was much higher. The RPI index (the only real measure of inflation at the time) increased by 340% in the 1970s (annual compound inflation of 13%).

https://www.swanlowpark.co.uk/...

On top of this, if you did manage to make any money in the 1970s tax rates were extremely high (incredibly at 98% being the top rate on investment income from 1974 onwards).

Numbers are there for everyone to see and make their own assumptions and judgements , but most importantly , investment decisions.

Your assumption and explanation is completely misleading for investing purposes. We do not compare the market returns directly to inflation , but I understand that people sometimes try to explain the unexplained.

I have £100000 and I made 30% return , then I made £30000. I do not then go and deduct the inflation rate.

I have written and shown to the forum here that inflation and high interest rates do not necessarily mean collapse of share prices. Perhaps in the very near short term , but , however, this has already happened.

2nd Jul '22

Podcast trial - I've revived the idea of a weekly SCVR summary in a podcast. This is just a trial version, about 30 minutes, which I've put on my occasional use personal website.

If you think it's any good, then I'll do them regularly, pls indicate approval by liking this message, or disapproval/indifference by not liking this post!!

Pls feel welcome to spread the word & link on Twitter too.

http://qualitysmallcaps.co.uk/...