Small Cap Value Report (Fri 10 June 2022) - AO. DFS, NXR, NET, PROC

10th Jun '22 by Paul Scott

39 comments 6967 reads

Good morning! It's Paul & Jack here with the last SCVR for this week.

Agenda -

Paul's Section:

Backlog items from yesterday -

AO World (LON:AO.) - closure of German business makes sense, due to continuing losses. I remain sceptical about AO's business model and ultimate viability even. One to avoid, I reckon.

DFS Furniture (LON:DFS) - profit warning. Just as I was warming to this share, recent conditions have deteriorated, as consumers cut back a bit. Maybe we've seen peak earnings for now? Guidance reduced to just below original "low scenario" profit for FY 6/2022. Customers cash deposits have been spent on divis & buybacks, which I find reckless.

Norcros (LON:NXR) - strong results beat expectations. Pension deficit only a minor issue now. Balance sheet sound. Big recent acquisition post year end has raised debt though. Looks one of the cheapest, decent companies on the market. Solid current trading too. An attractively cheap, well run, growing (by acquisition) group.

On to today's news -

Netcall (LON:NET) - a really impressive, big contract win. Shares are expensive, but could it now have reached an inflexion point that justifies the premium rating?

PROCOOK (LON:PROC) - a nasty profit warning today, with profit guidance roughly halved for FY 3/2023 - the perils of operational gearing being once again demonstrated. It's starting to look interesting now, and seems a fundamentally sound business. It's going on my watch list.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company…

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Monty Carlo

10th Jun '22

The inability to chart total returns is a major problem here on Stockopedia and all the long-term charts are tainted by it.

If you load a portfolio up properly in Folios and add the dividends you do get a reasonable performance proxy, but even then the total return versions of the benchmarks are unavailable (for "business reasons" i.e. they cost too much) so the chart displays apples vs pears. This could be partly overcome by permitting us to load a total return ETF as a benchmark proxy, which I have suggested.

You would hope that simple corporate actions like share splits are in there and we are seeing the factored prices (taking 2 examples: we certainly are for AMZN post-split, and the capital returns for ICG Longbow Senior Secured UK Property Debt Investments (LON:LBOW) are being adjusted for), but there is no way of verifying the underlying data.

I do know that the dividend histories here on Stocko can be a bit haphazard, with special divis sometimes omitted from the chart even though they are in the table (look at Somero Enterprises (LON:SOM) for instance) - it appears that Stocko struggles with special divis paid on the same date as a regular divi.

Maintaining a clean dividend history and the full corporate action log is, however, quite a demanding exercise, and I can see the business case struggling....

Epsilon

Norfolk

I understand the High St data gathering point that you're making, but maybe Unbound (LON:UBG) isnt the best example to choose - after all, only 12% sales come from the UK High St.

These 23 UK stores may be unrepresentative of the overall group given that they offer '3D foot scanning' to allow the selection of shoes that fit 'perfectly'. Clearly this same technology isnt available via the digital app.

Gostevie

PROCOOK (LON:PROC) looks like a good business to me but just seven months after a 145p IPO last November the share price is just about 48p. This is becoming far too frequent recently.

Tommy H

NextEnergy Solar Fund (LON:NESF)

The company has announced a livestream of the results presentation that can be attended by investors, and not just analysts

09:00 Monday 27 June 2022.

Link below

https://webcast.openbriefing.c...

Tommy (I hold)

Norfolk'n'Good

Thanks for adding further useful info Epsilon - in a way further endorsing my point, which is if we all share our individual findings for any given company, added together we will have a much bigger and much better and much clearer picture. I guess this does happen to an extent here naturally but I feel it needs to be encouraged - we can all learn from each other?

Cricketfan

Avation (LON:AVAP) (I hold) has been on a bit of a roll over the last fortnight. Richard Wolanski, the FD spoke at the recent Mello conference and I had a good chat with him. Talked a good recovery story I thought. It looks too as if a div is to be reintroduced albeit the rns is slightly confusing.

Views of anyone with greater knowledge of this sector (aviation leasing) would be gratefully welcomed. Thanks.

Purbow

Afternoon. It would be great to get your thoughts on Peel Hunt who announced their first results yesterday since the IPOd last year….

Brookeda

I was a huge fan of these prior to COVID and thought I would keep them forever. Thankfully I changed my mind a sold out just before the real crash and so minimized my losses. I think they have a strong management team with a lot of skin in the games and they should re-rate over time when they straighten out their finances. I honestly haven't looked at them too much in the last 18 months but would consider going back in when things normalize (Russia, COVID etc)

planetx

Hostmore rewarding its directors under their long term incentive plan with some seemingly nil cost options .

What is this rewarding ?

Hostmore long term incentive update -

Don’t worry though it’s only a token 496000 shares .

Nil cost

Wonder why this is released Friday evening 6pm !

Robbers - thieves .

I've met Richard many times & one of my kids has an ATR in Avation livery taking off from a wardrobe...

I like the company and they have consistently put a lot of effort into making themselves available to private investors - but that is different to saying they are a great investment. Aircraft leasing is a specialist area that can be much more risky than it looks.

It is a leasing business, so to oversimplify their cashflow is what they lease the planes for minus their blended cost of debt/equity. Excluding minor wrinkles, like Russia invading its neighbour and confiscating 500 planes, the risk is usually in whether they get their depreciation estimate right and are able to dispose of aircraft at book value or above. This is much more difficult than it sounds - the double-decker Airbus A380 did a lot of damage in some of the Doric Nimrod and Dr Peters funds. When jet fuel is expensive the thirstier planes get parked up, when it gets cheaper they sometimes resurrect them...

With Avation they are much smaller player and the upside was the scale gain as they transitioned from small turbo props to bigger ticket jets, as well as a reducing cost of debt as their credit rating improved.

COVID did indeed put the company under a lot of stress as they gave their airline customers breathing space and they had to extend their debt which whacked up the coupon. They've managed to shift most of the ATRs Virgin Australia handed back & it got a little too interesting for a whilewith a big 777 leased to Phillipines Air which went into restrcturing.

The management are often buyers of their own bonds, rather than the equity. Problem is that they are US market and extremely difficult to deal in from the UK.

There are less risky ways of playing the airline recovery if you are averse to investing too much time or money in a small cap (and it is a case of modelling the fleet) - AerCap is a much bigger, more liquid player that did have a bunch of planes in Russia, whereas Avation has larged ducked the Ukraine pain so far (although I think they have some Baltic customers who will be feeling nervous).

Paul Scott

Hi portugull,

There's an excellent interview on a trade website with Rob Pitcher, the CEO of £RBG (I hold).

H'e s a superb operator I think, and this share is significantly undervalued, yes I know about macro factors, so am taking those into account.

If you have the time, this is well worth tuning in to: https://www.propelhospitality....

If not, it's on my list of things to do (writing up my notes), but given that it's my birthday weekend, and I've got a fridge full of English wines to taste test them, and friends/family coming round, then there's a chance it might have to be deferred into next week.

Incidentally, Nyetimber (English wine) has not impressed me. Just opened a bottle of their Classic Cuvee sparkling wine, and it's no better than a £7 Cava, But it costs £30. Hmmm. I bought 3 bottles, just to be sure.

Here's part 1 of my mystery English wine shopping.

Hi Purbow,

Sorry we didn't get round to looking at Peel Hunt.

I don't like their ethos of favouring rich clients, and keeping their excellent research (which relies on close contact with company managements) away from ordinary private investors.

I hadn't realised its shares had crapped out considerably since floating.

Very cyclical, people businesses, so I suppose this sector is going to be under pressure right now.

I'd like to hear what readers think, we want your views too, as well as publishing ours! :-)

Regards, Paul.

gmtrader

11th Jun '22

Paul Scott- did you join the webcast for Marks Electrical (LON:MRK) yesterday? If so, what were your thoughts after it?

My concerns are:

Poor liquidity

The general economy affecting the company. This can be split into two parts.

1. as money gets tighter for the general public less will be spent which would affect revenues. On the plus side of this is the business is growing primarily through getting the company known to the public via advertising. Marks Electrical (LON:MRK) has only 1.6% of the sector sales and aims to grow this. They have no dates or targets as such but they would like to eventually hit 10% of the market.
2. Expenses will increase with everything going up in price. Wages, fuel and costs of vehicles all increasing will affect the bottom line.

On the plus side, it’s business model is nothing like AO World (LON:AO.) having just one depot to work out of they do not have trunking between depots.
They have a smaller team to pay wages too.

PE of around 18 is not the best but imo an acceptable level for a growing business that is profit making, cash in the bank and running on an EBITDA of 9%.
Regarding the EBITDA, 8% is very good for this sector. The previous figure of over 12% was before the ipo and is unrealistic as a listed company. They have done well to maintain the 9% level and are very confident to continue at that level.

It is worth noting that it is in these hard times it is the perfect time to find those companies that are coping and even growing as these are the companies that will likely survive a recession and then do well after.
If a serious crash of the markets happens or just a sector crash, then all companies will drop in price. Not a lot an investor can do about that. Either go all cash or take advantage of the drops.

I do think Marks Electrical (LON:MRK) will do well in time but for now it is in a sector that has been hammered. It is proving itself to be resilient in these hard times and still growing. Whether the sp drops further I’ve no idea but I do see this as a topping up situation on drops in the sp.

Anyway, just my view and I appreciate reading your reviews on a daily bases. (Any chance you can tie up Jack to stop him from leaving?)

Marks Electrical (LON:MRK) webcast

https://www.equitydevelopment....

Worth a watch. Paul Hill and Justin from VOX talk. Marks Electrical (LON:MRK) are part of the talk. (Sorry if the link doesn’t work).

Hi gmtrader,

Yes, I watched & took notes through the Marks Electrical (LON:MRK) webinar. I though it was excellent, and management come across really well. I particularly like their common sense, no frills business model & attitude.

My opinion is now a lot more favourable, and I've added it to my watch list. This share could do well long term.

For now though, I think the valuation is too high, given macro conditions & bombed out valuations for most small caps. Hence I wouldn't want to pay the current, c.90p share price. 50-60p is where I'm at, in terms of valuation in difficult conditions now.

I'm aiming to type up my notes from this, and 3 other webinars, so watch this space in next week's reports.

Best wishes, Paul.

Cheers Paul.

Totally agree with you regarding the management. I’ve had several contacts with the cfo, Josh, and been very impressed.
As for price, I’ve no idea how low it may go but as with all my holdings, I only buy a small amount to start with and add at key support levels to build a bigger holding providing I am still happy with the company.
I am looking to double down at this level which will still be a small holding of just 2k then. With being a new listed company there are no support levels to work off so I suppose working off the PE is probably the best way. Will probably double down again if 70p is hit and a final double down purchase in the 50’s which currently I would be very happy to see.
All the best.

Boon

12th Jun '22

Read through the latest Barclaycard monthly consumer spend report for month of May.

Some interesting points. My comments are in italics:

Furniture stores (-25.4 per cent) and sports and outdoor retailers (-19.6 per cent) were two categories that saw noticeable declines in May compared to the same period last year, when demand was high. Furniture stores were also down month-on-month (-3.1 per cent), suggesting that shoppers are reducing spend on bigger-ticket items as living costs rise.
Even Grocery and Speciality Food (excl hospitality, restaurants, etc) saw slight declines YoY. Despite inflation.
Clothing retailers also saw growth compared to April (8.6 per cent), perhaps due to a combination of Brits updating their wardrobes for the summer, as well as increasing inflation. So it looks like short-term, the trend looks good.
the travel industry, which outpaced inflation and saw triple-digit growth (189.7 per cent) compared to last year. Encouragingly, the sector also grew month-on-month, with travel agents seeing a sizeable uplift of 24.2 per cent and airlines growing 6.6 per cent. Encouraging to see travel agents see MoM growth, as they are a lead indicator for travel, as people book in advance (but complicated by buy now pay later). Summer travel strength looks like it is in the bag now.
spending on digital content and subscriptions declined -5.7 per cent. This comes as a fifth (21 per cent) say they are reviewing their subscriptions and cancelling any they can live without, with 18 per cent of these Brits cancelling a TV or streaming service.
restaurants (-5.9 per cent) and bars, pubs and clubs (-1.2 per cent) seeing slight declines when comparing spending in May 2022 with April 2022. This is very bad news for hospitality, when taking into account inflation. Albeit hard to compare, as April did have Easter long weekend.

Off the top of my head, this bodes well for Saga (LON:SAGA) in terms of Cruise, Travel Agency, and FX sales. Also for Quiz (LON:QUIZ) as they specialise in dresses, which will be in demand for summer travel given people need to update travel wardrobes. Bodes well for £SSP recovery at train stations and airports.

I would be avoiding the likes of DFS Furniture (LON:DFS) and Made.Com (LON:MADE) with the spend trends going quite negative now. And keeping an eye on hospitality without a strong loyal customer and/or affluent customer base with discretionary income. Revolution Bars (LON:RBG) and £HOST and £CBOX and Restaurant (LON:RTN) come to mind. Although perhaps very value-focused like Fulham Shore (LON:FUL) might continue to do well as people trade down.

(I hold SAGA in The Boon Fund)

Small Cap Value Report (Fri 10 June 2022) - AO. DFS, NXR, NET, PROC

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