Small Cap Value Report (Fri 1 Nov 2024) - STB Briefs: SRT, SAAS, BOO, RKT

1st Nov '24 by Paul Scott

144 comments 9676 reads

Good morning from Paul!

That's it for today, sorry SEE is only half-done, but I've run out of time, so that should appear on Monday. Have a lovely weekend! Podcast should be on Saturday.

Phew, am I glad it's Friday, this has been an exhausting time in recent weeks, with very volatile small caps markets, all the budget uncertainty, etc. We all deserve a thoroughly good rest this weekend!

I must thank everyone for the lovely reader comments yesterday - it's very much appreciated, and quite a thing to have retired fund managers patting us on the back. I was chuckling away, as everyone seemed to know each other! Maybe someone could organise an informal drinks evening at some point!? It would be great to put some names to faces and have a natter over a few pints. Although we have Mello Derby coming up shortly, where I shall be floating around both days & happy to talk shares with anyone & everyone :-)

I noticed that Evoke (LON:EVOK) has bounced strongly post budget, which reminded me that the media warnings of punitive budget measures targeting gambling companies didn't happen. I wonder if work is being done behind the scenes on more tax raising measures? After all, the Govt & civil service would only have had enough bandwidth to focus on a few key areas in this budget. So I suspect they might return to some issues next time.

I'll be writing to Rachel Reeves to urge her to give everyone some certainty - the big lesson she needs to learn is how negative messaging followed by a long delay causes actual, measurable economic damage - as we saw with consumer and business confidence surveys plunging in recent months. Confirming that corporation tax will not be changed in this parliament was an excellent move. We need the same thing on key issues for investors - eg assurances that they won't meddle with ISAs, or pensions tax relief, etc. Then people can plan ahead.

The IHT change, if implemented (it's only a consultation at present, I'm told) is a huge issue. Imagine how many billions there must be in defined contribution pensions? If that's all now going to be newly subject to Inheritance Tax, then I think we'll see a lot of people changing their behaviour - eg one friend has already told me that he's intending…

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jamesalastair

1st Nov '24

Fancy a JV beef enterprise in Uruguay?

When I left the City many moons ago, I applied for a job as a ranch manager in Venezuela. The advert said "ability to ride a horse an advantage". It turned out to be with the Vestey beef operation and I was interviewed by Tim Vestey. The poor man could not understand why the young man sitting in front of him, who had been working in accountancy for one of the top corporate brokers in the City, wanted to take a 95% salary cut to work for him on the pampas and I did not get the job.

Boon

Great presentation today Paul at the Mello @ London Investor conference! First time I've watched you live!

Don't forget you also have to model out the operational costs for processing the deluge of ambulance chasing claims that will be submitted to Secure Trust Bank (LON:STB)

That is the lesson from PPI - it is not only the actual payouts that you have to model, but the huge operational cost of processing all those claims, many of which are bogus.

Am I right in think that the companies now to avoid are those that will be greatest affected by the triple whammy...

Those that hire lots of part-time workers (NI threshold is being lowered from £9100 to £5000)
Those who hire lots of 18-20 year olds (increase of minimum wage by 16.3%)

So the likes of retail outlets, fast food, quick casual restaurants?

I'm thinking like Tortilla Mexican Grill (LON:MEX) , Comptoir (LON:COM), Everyman Media (LON:EMAN), XP Factory (LON:XPF), the supermarkets, even like SSP (LON:SSPG). Someone else mentioned Card Factory (LON:CARD) as well? I've recently disposed as Safestay (LON:SSTY) for other reasons, but think they will be impacted too.

(I hold Comptoir in the Boon Fund)

The Jayman

2nd Nov '24

Could they be impacted by tariffs should Trump be elected President and materially increases tariffs on Chinese good (where W7L's products are sourced from)?
I am a holder and see this as the only cloud in the sky, but will take some profits if we get to 650p again. I bought around 130p, my father at half that, and we wish we had more like this.

Hi Northender

I live in a rural area and know (and am related to 1) farmers it's true that low returns on assets employed and very low incomes versus the work/hours involved are common, particularly among smaller livestock farms.
You are also correct in instancing family dynamics as a complication.
It's also a truism that its rare to meet a farmer who admits to having had a good year.
I think the piece missing is subsidy payments on the one hand, food security on another, and stewardship of the environment.
Personally, I think if there is to be "reform" (not explained at all in the context of CGT or IHT) then they should look towards much larger farming units which can plan for the tax.
Personally, I think the only true "loophole" is farmer being able to claim IHT APR and also rebasing their costs at death for CGT purposes.

Paul Hill

Many thanks Boon - & apologies I missed you. It would have been great to have put a face to a name afterwards.

BTW, if you're coming to Mello in Derby on Wedn 20th Nov, then Dave Stredder usually puts me on the 8.30am 'hangover slot'.

Spender71

Clever man your Dad.

Zipmanpeter

Re Card Factory (LON:CARD) - I also think the budget may actually be positive for them in the medium term. It still has scope to raise prices on products with a >70% GM and a wide range of price points and is perceived as offering good value (according to the research they put out to analysts).

At the bottom end of the market, it's customers are getting good wage rises (NLW, public sector workers) and I suspect cards are less likely to be cut back on, more traded down if money is tight. Card giving is deeply embedded in UK culture and is adapting to modern trends well - cards for dog, new celebrations like Halloween, new relationships and religions). CARD are also adding higher margin additional lines as it gets going on integrating gifts better in the same floor space.

Its competitors in the physical retail channel are less well placed to respond (will Clintons go under again!) whilst online is more costly and must be facing challenges from rising postage and delivery costs). I'd expect CARD share to rise again.

Only a full on UK recession (or a return of Covid!)) that triggered far less footfall would worry me on a >12month basis.

Finally, CARD are trying to diversify internationally (owned business in SA/Eire, deals in Gulf, US, Australia). I think they have a good chance to add usefully over time. (They have so missed out online even this is a potential upside as they at least go omnichannel and exploit their physical store advantage over the likes of Moonpig)

Since CARD finances are now in good order, I think I will get a divi whilst waiting for recovery. From <90p, a 50% rise back to >135p looks very possible when the national mood eventually lifts.

And not for the first time for him . . . . . . .

3rd Nov '24

Agreed - the cost of responding to claims, or undertaking a remedial project at the behest of the FCA, will often exceed any underlying redress/compensation.

I think Warpaint London (LON:W7L) will get crucified if Trump gets in and implements his crazy tariff plan, but then so will many other UK and European stocks, even those without Chinese sourcing. I am increasingly of the view that Harris will win, so keep my over-sized position in lipstick, but I will be watching events with some nervousness. I am a great fan of the art of doing nothing very much.

Jacxx

I imagine AI's place will come in time but too much uncertainty re: hallucinations etc. and the reputational implications of a wrong judgement / assessment could be large. i.e. they're not going to go down that route until there's a proven, reliable product and Gov has developed a clear policy on its use (which for now is don't trust it.)

On Made Tech (LON:MTEC) - could well be a beneficiary. A good data point is an increase in government outsourcing/consultancy rather than just net spend. A big issue with the civil service is digital products not being connected. A lot of the civil service has been 'modernised' but they all use different systems, which creates a huge drag on productivity (a simple example is one department will use MacBooks, Google Drive and Google Meet whereas another will have windows computers, use Sharepoint for storage and Microsoft Teams for meetings.) I suppose an issue with the civil service all using the same system is too much reliance on one provider... so who knows if they'll ever get there.

Spancan

Time to rethink IHT strategy. Currently I have £350k in a HL SIPP that I have no need to drawdown from. With SIPPs now coming into the IHT net as a result of the Budget, I now will consider drawing down £22k (the amount that would be subject to 20% tax) and invest the monies in BPR shares within a Stocks/Shares ISA. Obviously these shares will be subject to to 50% relief from the 40% IHT rate which is better than the SIPP being subject to 40% then a further minimum of 20% in the hands of the recipients . Specific IHT BPR plans on the market are very expensive on charges etc (no offence to Megan Boxall’s family) and there is no reason why you cannot construct your own BPR shares in an ISA. It would be good Paul and Graham , if you could state if shares especially on AIM in your report qualify for BPR ! Even better if a screen could be added. This would certainly give added value to the Stockopedia subscription.

Thanks for your thoughts on this jamesalastair

I prefer referring to a deliberate strategy of “masterly inactivity”

Hi Spancan

The problem is the risk lies with the holder of the AIM shares - and they must make a claim for relief for their holdings and show that they satisfy the eligibility criteria (for BPR) applicable at the time of death not when the shares were originally bought.
HMRC do not publish a list but they are the arbiter.

Most AIM manager constantly speak to the issuer companies to ensure they believe they continue to meet these criteria.
You might want to look at readers’ comments in the week running up to the budget and the top 10 or so holdings for the portfolios of many leading IHT collective funds were reproduced.

All this jumping through hoops to avoid 20% tax...

I get it makes sense if you're about to die within the next 12 months, or 24 months. As generating that sort of investment return is a decently high hurdle.

But if you think you might live another, say, 5 years... then is it worth limiting yourself to BPR-qualifying shares, rather than being able to invest in anything you want? Surely with some effort, you can generate 4% more per annum than the forced-BPR investments?

PitBullCH

4th Nov '24

It's really strange: CNN - which is normally Dem/Harris-leaning, was showing internal calculations this morning showing a Trump victory slightly more likely, and the Daily Telegraph - which is normally Trump/GO- leaning, was reporting Harris as the more likely winner. Feels like it really is on a knife-edge.

To your last point: Ride Tandem are a start-up trying to address this market - doing ok so far, one of their KPIs is "wages enabled" - i.e. the wages received by the people they take to work that would otherwise not be able to work.

Brilliant Leader

I agree Boon, one shouldn’t let the tail wag the dog.

Small Cap Value Report (Fri 1 Nov 2024) - STB Briefs: SRT, SAAS, BOO, RKT

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Paul Scott

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