Small Cap Value Report (Fri 1 June 2018) - CDM, DTY, PCF, HYNS

Friday, Jun 01 2018 by

Morning folks,

There is a lot of trivial news today, but sorting through it, I think I can find a few interesting stories. Let's see!



Codemasters Holding (LON:CDM)


  • Share price: 200p (placing price)
  • No. of shares: 140 million
  • Market cap: £280 million

Admission to AIM and First Day of Dealings

Codemasters is a video game developer and publisher, specialising in racing games. The company announced it would float today in a placing announcement earlier this week.

It has been around for 30 years and has 500 full-time employees across 3 UK locations and an art production facility in Kuala Lumpur. Its main franchises are "DiRT", "GRID" and "F1". It owns the rights for DiRT and GRID, while Formula 1 is owned by Liberty Media.

Most of the IPO proceeds are going to its majority shareholder, an Indian conglomerate, through that conglomerate's Singaporean subsidiary. The selling shareholder is selling 60% of the company to raise £170 million (gross), more than ten times the IPO proceeds to be received by the company itself.

As mentioned recently, I tend to prefer IPOs which are more focused on raising money for the company than on letting the existing shareholders exit. But that's just a general rule, and we can always look into the specifics of any situation.

Admission Document

I've pulled out the Codemasters admission document from its website - the key information source for any new stock.

According to this, the company has been producing Micro Machines for many years. This is a fun racing game I played when I was a bit younger - it was an extremely good title.

The document also reveals that GRID and DiRT are successors of Toca Touring Cars and Colin McRae Rally - while I didn't play them so much, I do remember that they were huge titles at the times. I haven't owned a games console in something like ten years, so it's no surprise that I don't recognise their names any more.

Anyway, the admission document has 145 pages, so in a situation like this where I am under some time pressure, I need some shortcuts.

I want to understand the relationship with Liberty Media a bit better. Using the search function, I find:

the loss of…

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All my own views. I am not regulated by the FSA. No advice.

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Dignity plc is a United Kingdom-based provider of funeral related services in the United Kingdom. The Company operates through three segments: funeral services, crematoria and pre-arranged funeral plans. The Company's funeral services relate to the provision of funerals and ancillary items, such as memorials and floral tributes. The Company's crematoria services relate to cremation services and the sale of memorials and burial plots at the Company operated crematoria and cemeteries. The Company's pre-arranged funeral plans include the sale of funerals in advance to customers wishing to make their own funeral arrangements, and the marketing and administration costs associated with the sales. The Company operates a network of approximately 720 funeral locations throughout the United Kingdom trading under established local trading names. The Company operates approximately 40 crematoria in England and Scotland. The Company's number of active funeral plans is approximately 374,000. more »

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PCF Group plc, formerly Private & Commercial Finance Group plc, is engaged in banking business. The Company offers retail savings products for individuals. In addition, the Company deploys those funds through its two lending divisions such as consumer finance and business finance. Consumer finance, which provides finance for motor vehicles to consumers. Business finance, which provides finance for vehicles, plant and equipment to small and medium-sized enterprises (SMEs). The Company also provides both depositors and borrowers with a service and a straightforward, range of products tailored to suit their needs. more »

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Haynes Publishing Group P.L.C. is a United Kingdom-based company, which creates and supplies practical and informative content to consumers and professional mechanics in print and digital formats. The Company operates through two geographical segments: UK & Europe, and North America & Australia. The UK & Europe segment has subsidiaries in the Netherlands and Italy, among others. Its core business is the publication and supply of automotive repair and technical information to the professional automotive and do it yourself (DIY) aftermarkets in both a print and digital format. The North America & Australia segment publishes DIY repair manuals for cars and motorcycles in both a print and digital format. It publishes titles under the Haynes, Chilton and Clymer brands, in both English and Spanish. It has a branch operation in Sydney, Australia, which publishes various products under both the Haynes and Gregory's brands. Its consumer content is delivered via both print and digital channels. more »

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  Is LON:DTY fundamentally strong or weak? Find out More »

45 Comments on this Article show/hide all

Julianh 1st Jun '18 26 of 45

In reply to post #368899

Hello anothersaxman58
Definitely an interesting question. I think it was John Maynard Keynes who said "the markets can stay irrational longer than you can stay solvent." The efficient market hypothesis says exactly the opposite - that markets (on the whole) are good at balancing all the information currently available. But how can the market synthesise profit trends, debt levels, interest rates, Trumps ego-mania, Putin's attempts to destabilise the West.... to get to a sensible composite position. Even more difficult is that some of these factors are so binary: trade war - on or off, Brexit deal - on or off...
So I have been doing something a bit like you over the last two years - taking money out of the market. I am now about 25% cash. Where I think I may have been doing it differently is that I am trying to focus on holding high quality businesses with good barriers to entry and no debt, good ROE / ROCE and good free cashflow. These companies are usually (often very) expensive but their businesses are less likely to suffer even if their share prices might crash. And (I think Graham recommended this recently) I am putting together my plan for how to react when the recession / bear market / crash comes along - so that I know what to do even while my panic reaction leaves me like a bear in the headlights.

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JohnEustace 1st Jun '18 27 of 45

In reply to post #369034

I'm inclined to be cynical about all of these pre-paid funeral plans and will be entirely unsurprised if the Treasury investigation finds some serious issues and decides to place them within the remit of the FCA. It will surely be better for most of us to build up some savings in our own account.

However Dignity do say that "The money required for your funeral is held securely in the independent National Funeral Trust where it is carefully looked after until it is needed." which makes me think that it isn't sitting on their balance sheet.

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InvestedGeordie 1st Jun '18 28 of 45

Hi Graham,

Thanks for the report, as always. Whilst we're talking about gaming, I can't be help mention Frontier Developments (LON:FDEV) - you'll recall you kindly covered them a while back, and the shares have increased in value by over a third since then. I have read today that Jurassic World: Evolution has 'gone gold' & copies have been received by reviewers (but are under strict NDAs).

There will be a live game play reveal at E3 on Sunday 10th before release Tuesday 12th.

Remember this is a multi-platform (PC, PS4 & Xbox) global release. Tencent have approx 9% of Frontier Developments (LON:FDEV) and a man on the BoD. As such, they will be pushing this heavily in controlled territories where their distribution platform 'WeGame' is dominant (China, particularly).



NB - I hold a long position in Frontier Developments (LON:FDEV) and topped up today @ £17.99

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DMG2305 1st Jun '18 29 of 45

In reply to post #368939

Hi Camtab,

Buy and hold should always work if you invest in companies that are well managed, growing and reasonably priced. Price action follows the performance of the business so if earnings and dividends are growing the share price (usually) keeps up to pace as long as the rating is not excessive. Your example of Pressure technologies is not a great one imho. It took a tumble from 2 to 1.4 on Wednesday after a poor T/U. Paul Scott didn't seem to have a particularly great view of it and management felt it was going to under perform market expectations. If there is any sort of doubt about the future prospects of a company why invest? There are loads out there with great prospects! Unless you are a talented short term trader with the time to do so then buy and holding good businesses that compound earnings and divis over time is the only way imho!
The very best of luck.

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Graham Neary 1st Jun '18 30 of 45

In reply to post #368944

re: Haynes Publishing (LON:HYNS).

Nice tip Dr. Vodka. Done!

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mammyoko 1st Jun '18 31 of 45

Lovely commentary on PCF (LON:PCF) and well done Graham. I bought in on the back of your conviction in December and have done very well as a consequence. Great to have two such compelling writes on this site who cover very different sectors and with two such different styles. Your technical analysis of financial shares is first rate and has taught me a lot.

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fifthcolumn 1st Jun '18 32 of 45

In reply to post #368899

Hi, I've been hearing that this so called bull market can't last for a few years now but it still keeps going despite the occasional hick up! As a result I stopped reinvesting but didn't trim or sell out. I'm glad I didn't because my picks have kept on rising ( despite the occasional hick up ). So as I am absolutely terrible at timing the market I intend to reinvest slowly and choose strong well run companies ( Hopefully ). What's the rush? I would rather take my time and get it right. I tend to buy and hold for a long time and this has always worked for me although I sympathise with those who say this is a bad strategy as they watch their high flying shares return to normal original pricing! I know that Black Swans can come out of nowhere but the market shrugs them off over time. I believe I read on one of Paul's comments that Banks could fail if things go seriously belly up in Europe so I'm wondering where everyone keeps their cash that they are not investing? Isn't a bank account just as risky as the stockmarket?

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DJCP 1st Jun '18 33 of 45

To add to the discussion, and also one suggestion.

My portfolio summary is :
<2% in cash (worried that I'm nowhere near those previously mentioned!)
26 holdings (too many for me really, but a few are remnants from mis-investing!)
Largest holding accounts for 20%
Top 6 for 60% and top 12 for 85% - So you can now work out the dregs as mentioned, plus a few speculative punts = 14 stocks for the remaining 15%.

I split my holdings into 3 size categories - >5%, 2.5%-5% and <2.5% which accounts for the 6, 6 and 14 above.

I think my main downfalls are not doing enough DYOR, catching falling knives, and top-slicing too soon - All of which, as I'm aware of them, I'm trying to improve/curtail.

Now to my suggestion - There's been a lot of general discussion on SCVR, not related to an individual stock, but extremely interesting to read, learn from, ponder and obviously discuss. Would it be an idea to have a weekend SCVR to discuss (at a more leisurely pace) one of these topics, ideally proposed by Paul/Graham - Italy, Retailers, CVAs, Pension deficits etc. as some examples that come to mind recently.

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Philip Wigg 1st Jun '18 34 of 45

I think the reason that Dignity (LON:DTY) has been marked down so much is because they're frightened about what funeral price transparency might mean for their profits.

Dignity (LON:DTY) makes it very difficult for people to calculate (and hence compare) the overall price for a funeral up-front with a complicated pricing model make up a many separate costs for different things.

If they were forced to offer a simple overall cost (which is where I think the CMA is going with this) then it would be obvious that Dignity (LON:DTY) is more expensive than it's competitors by a considerable margin.

I held Dignity (LON:DTY) for several years and luckily got out at £25 but I wouldn't be investing in them at this point.

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mammyoko 1st Jun '18 35 of 45

Your warning on Alfa Financial Software Holdings (LON:ALFA) from June last year finally played out this afternoon. Well done again, Graham.

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brballs 1st Jun '18 36 of 45

In reply to post #369129

I actually just read that whole report from 1st June 17 and my goodness, all the company reviews Graham wrote were spot on!

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TQ12 2nd Jun '18 37 of 45

In reply to post #369059

Using $1.30 translation my back of the envelope ATVI vs FDEV relative valuation still has FDEV as comparatively cheap despite rising 37% (vs ATVI +12%) since Graham's update last September. ATVI has current EV of around $55bn and FDEV is $775m, so that's a x71 uplift, yet the PBT uplift based on FDEV's 2019 and ATVI last FY is only x45 (1.2bn vs 26m). Judging by the unheralded pre-release demand for JWE as evidenced by Steam, not difficult to imagine that broker estimates (only 3 of them of them) are way too conservative. Perhaps a better read across for FDEV is KWS ($1.4bn EV), FWIW i consider FDEV as a more valuable business than KWS. The latter being too reliant on acquisitions for my liking. DYOR

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Tanglands 2nd Jun '18 38 of 45

My view of dignity is that prepaid funeral plans will be the next equitable life scandal.
Although held separately from the companies funds the amount of money lost in commission and other costs is considerable, So the plan will fall short of the cost of the funeral. Fine if there is no guarantee, but some of these plans guarantee that it will buy a funeral, and it won’t. Watch this space, if the regulator gets this right it will get very messy.

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Merlotman 2nd Jun '18 39 of 45

Interesting discussion on cash holdings and market timing. After a happy year in 2017 investing in high QVM shares and chasing a bit of momentum I am gradually switching my portfolio into good quality shares with a long divi track records and reinvesting divis using the approach popularised by Jeremy Seigel and others. In this way if the market falls, the divis buy more shares at lower prices and you dont have to worry about timing the market. Of course the real risk of this buy and hold approach is that some of your portfolio cut divis so I diversify across industries. The other uncomfortable characteristic is that the shares you invest in may not always have great value particularly the more defensive ones. I also accept that my potential outperformance of the market will be less and that you need a longer time frame for this strategy to work. Whilst this does mean I am more at the mid - large cap end of the market there are some smaller names in my portfolio e.g. Bloomsbury Publishing (LON:BMY). This should suggest that I should always be fully invested but I haven't been brave enough during this current bull run and am currently around 18% cash! Ill drip this in over the next 5 years or use it all if there is a major correction.
What would be really interesting is if Stocko could do an annual survey of cash holdings amongst its subscribers (I know that a similar thing is done in the fund management business) incorporating any hedging.

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millen 2nd Jun '18 40 of 45

In reply to post #368964

Yes a survey is a nice idea but I suspect for many PIs 'cash holding' is a vague number - surely most hold quite a lot outside their main portfolios in bank accounts that could be deployed in extremis but is typically there for possible major expenses eg house move/ refurb, car purchase, buffer of several years' living expenses etc? In my case I'd typically want 20-25% of my main portfolio value as available cash.

Other things perhaps worth surveying are:

1. Trading frequency. Even though I spend perhaps 1-2 hrs/day on investment matters I manage to make barely 1 trade a month, maybe 2 at best!  Perhaps my natural indecisiveness?

2. Portfolio concentration and diversification. I sense that many Stockopedians are way more concentrated than most investment 'professionals' would recommend. One thing I found staggering about this article was the quote "The major concern for our panel was the spread of the investments. A portfolio of that size would typically be divided between at least 20 funds – not just two, said Jon Treharne, of IFA Shore Financial Planning." So for a £1/2m portfolio the experts recommend over 20 funds, each of which will have perhaps 30-60 holdings, ie getting on for 1,000 individual holdings, presumably with appreciable overlap. OK I know we're not talking entirely UK equities here as there will no doubt be a lot of overseas stuff, bonds, commodities etc in a balanced portfolio, but I am genuinely concerned that the 'conventional wisdom' is to run such huge diversification.

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Merlotman 2nd Jun '18 41 of 45

In reply to post #369214

Millen point taken on cash holdings but what I was thinking was more along the lines of how much PI's cash %holdings have changed over the last month, year etc. Cash holdings will also reflect liquidity of portfolio and trading style - I would have expected that those with lots of illiquid small caps would see bigger shifts in cash holding % so the important data is how much their cash changes over time.
Re trading frequency - sometimes I don't do anything for 4 or 5 weeks. It depends on your investment approach. If you are buy and hold you are going to be trading less than say a technical trader. All other things being equal I think fewer trades better but you might have more activity in the early days as you are finessing your investment approach
I agree the Telegraph comment is nonsense. Somebody with a portfolio of 20 diversified funds is going to end up with a very expensive tracker. This was clearly written with investment fund managers / advisors interests in mind!

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DaviStoVest 2nd Jun '18 42 of 45

I'm a relatively recent investor and would regard myself as still a beginner. I hold about 30 individual stocks, give or take, with a UK bias but with substantial international exposure. This accounts for 80% of my investment. The balance of my holding is in ETFs and closed end funds. I have selected the funds and trackers with the aim of giving me exposure to advanced overseas economies (US and Germany), to tech. stocks, to China and Asian markets and other emerging/frontier markets, to small turnaround situations, and to start-up businesses.

The investment in funds and trackers gives a bit of ballast and diversity to my portfolio and also gives me exposure to sectors/markets that I would not feel confident investing in directly ... although the diversification means that I am clearly not going to benefit much from multi-baggers and the like.

I run a small notional trading fund alongside my main investment portfolio, with a strict limit on cash committed to it. Good job ... I haven't enjoyed a lot of success in trading so far.

I don't really hold any cash in my investment account. I have free cash available that I could afford to invest amounting to about 50% of my current investment. That is powder that I am keeping dry for the moment, in part pending the next major bear market, although it seems a bit too much and I will probably reduce it as I move from beginner to intermediate status as an investor. My margin account gives me headroom to increase my holdings by about 25% at any time without having to hold cash with my broker. That's more than enough flexibility, I believe.

I am not expert or experienced enough to argue a strong case for my approach. I feel comfortable with it, however, and am achieving reasonable returns. Of course, I'd do a lot better if only I'd prune my portfolio down to just the 'winners' ;-)

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iwright7 3rd Jun '18 43 of 45

In reply to post #369214

I have never understood the logic of holding multitudinous funds either.  I can though see a case for holding a internationally diversified selection of low cost ETFs, especially if you don't have the time or inclination to study the market. It was Warren Buffett that once famously said: “Wide diversification is only required when investors do not understand what they are doing“.


About 20 companies appears to be an optimal holding between individual stock risk and market risk. This should be conventional portfolio wisdom, not the piffle espoused by most financial managers.

P.S. I hold around 30, just to be sure!

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gus 1065 3rd Jun '18 44 of 45

In reply to post #369324

Hi iwright7.

I tend to be sceptical of most claims about “this is how the market works” wherever they come from, preferring to assimilate the various theories, distil an approach and then trial it to see what works. (I trained as an economist and found most abstract theories fell apart on first contact with the real world!). When it doesn’t work I’ll adapt and try and find something better.

I had reason a couple of years ago to take on a reasonably large sock of cash for long term investment (I pulled together several occupational pension schemes and AVC’s into a single SIPP) and was faced with the interesting challenge of where, when and how to invest it. On the principle that “diversification is the only free lunch in investing” (not everyone agrees with Buffett’s concentration ideas and given the large FUM he controls even he/B. Hathaway has a surprisingly disparate range on investments), I set about looking for a framework for investment that would have a reasonable chance of protecting capital while offering a decent (not necessarily market beating) return.

For various reasons I’ve kept this separate from my active investment portfolio of individual shares and limited my portfolio to the universe of collective investments (i.e. passive and active funds and ETF’s). Likewise, rather than take on the market timing risk of investing the entire lump sum at the outset, I’ve been dripping it in monthly over the past 18 months to a point that it is now just about fully invested and the only cash is coming from accrued income and dividends.

Still early days, but I’ve learned a few things. Firstly, by breaking the global investment market up into sectors by geography (Nth Am, Europe, UK, Asia, Emerging Markets etc.), asset type (fixed income, equity, commodity, property etc.), investment focus (sector, market, asset type, etc.) and investment structure (active managed, passive index, ETF etc.). you quickly end up with a very big matrix of potential areas for investment. On top of all of this, there is the added complexity of Foreign Exchange translation added to the mix. Secondly, there are a huge number of investment funds of wildly varying historic performance and fee structures to choose from, all claiming to be the “best” in their respective fields. Thirdly, trying to predict future events and their consequences on the markets seems pretty fruitless. Even if you call the event correctly, the market often seems to move in an entirely counter intuitive way (think Brexit referendum and the rise in UK markets, Trump election and the bull acceleration in the US). So far as I can tell, I’ve yet to find a single investment that (realistically) claims to be a tracker of “the global investment universe”, so I’m stuck with trying to build a proxy to deliver this from scratch.

Accordingly, rather than try and second guess what will happen, I’ve looked to construct a “portfolio for all seasons” that will hold value, earn a decent return and contain checks and balances with gains offsetting losses. As a result, the number of holdings is quite large, about 50 separate investments, and even at this level there are areas that are ignored/under invested. (For example, there’s very little fixed income as I find it hard to make a case for buying bonds at the moment in a world of high debt/potential for credit default and rising interest rates/reduced bond prices). Even so, I’m still not happy with the mix and think I need to do more to protect against systemic risk from a global downturn (I don’t necessarily think it’s about to happen, but the investment objective is to try and take market direction prediction out of the equation).

Early days, but results so far are OK. Casual observation is that the ETF’s have (surprisingly) significantly under performed the basket of funds, the managed funds have done better than the indexed funds (even allowing for the generally higher fees) and the Investment Trusts (with the benefit of some leverage) have done best of all. Oil linked funds have done well, gold linked funds have been poor, small caps have beaten mid and large caps and Japan and Asia have been the best geographic markets. None of this is very scientific, other than to observe that in the general chaos of the global market, it’s very difficult to prescribe a priori what will give the best outcome in the future. With this in mind, I’m quite comfortable to take a wider level of diversification than theory might suggest and try and back all of the horses rather than pick the winner.


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iwright7 4th Jun '18 45 of 45

In reply to post #369344


The good thing is that there are lots of ways to systematically invest in the stockmarket.

I am normally an individual stock picker, rather than a sector pricker and am happy to avoid too much diversification. More particularly I adopt a high QM selection approach so am relatively active - If a company loses momentum for too long it wont stay in the portfolio and will be sold to make way for something else.

Each month I cross check my results against UK market indices. For  the12 months to end May there was a disparity between large and small caps gains: My end May notes: FT100 higher @ 7700 (+3%) vs. 7530. AIM100 @ 5650 vs. 5000 (+13%). AIM has done very well over the last 18 months, so its a pity that there is no AIM 100 ETF/fund available.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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