Small Cap Value Report (Fri 11 Mar 2022) - MEAL, SRT, SHI

11th Mar '22 by Paul Scott

51 comments 7588 reads

Good morning, it's Paul & Jack here with the SCVR for Friday.

Agenda -

Paul's Section:

Parsley Box (LON:MEAL) - £5.9m placing (mainly funded by Directors) completes, so the company lives to fight another day.

Srt Marine Systems (LON:SRT) - also does a 25% discounted placing at 30p. Only 10% dilution though, so shareholders can't complain in the circumstances. So the lesson seems to be that there is still funding available for companies with a good story to tell, but institutions are clearly demanding a hefty discount, which is likely to do permanent damage to share prices. So why hold anything that is likely to need more funding, when you can probably buy in cheaper when the discounted placing is announced?

Sig (LON:SHI) - 2021 results don't impress me. Eking out a tiny margin from huge turnover, just doesn't look a very good business model. Outlook comments are upbeat, so it looks like 2022 might be a better year. Overall - very uninspiring. I have to ask, are they just busy fools? Maybe the company needs to merge with a competitor, and strip out duplicated costs, to create a business that actually makes some money?

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 name/ticker, otherwise people won't necessarily know what company you are referring to.

Paul’s Section:

Parsley Box (LON:MEAL)

There’s confirmation today that the £5.9 placing (mainly funded by Directors & their associates) at 20p has completed (subject to a General Meeting vote, which should…

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davidjhill

11th Mar '22

Thanks - except the Reach (LON:RCH) analysis isn't very good imo. It's very superficial and in order to put a negative slant on the investment thesis decides to arbitrarily pluck some greatly reduced numbers out the air to show the cashflow "could" be negative this year. Those assumptions aren't based on guidance from management, who do actually know what is going on in the business and are quite open about it if one cares to listen to them present, and actually doesn't drill into what makes up the cashflow either (eg the residual final payment from the Express purchase ) so it all becomes a waste of time and energy imo. I can take any company and create such a case but its not very helpful in estimating reality.

Boon

True. But even if she was underperforming the benchmark, it wouldn't affect her emotionally too much. Because it isn't her own money, despite it being billions. Yes, she will feel a bit of professional loss of pride, underperforming the market. Also probably a bit upset that her bonus will be lower.

Whereas I am sitting, YTD, having beaten all the UK benchmarks at only a c-1.5% loss, but still feeling worse than her. As emotionally in my mind, a loss is still a loss, and it is my own money. I am not feeling euphoric or content that my portfolio has beaten the market. Even though I know I should, logically.

Seems like the fund's weakness is determining whether companies are under or over-priced.

Their fund strategy is to find good quality companies that can deliver long-term growth. Fair enough. And their playground is UK All Companies, since that is their benchmark.

Yet they've underperformed for CY2021 (4th quartile), also for Q1 2022 (4th quartile), and also for 2H2021 (fourth quartile). Despite the market having radically changed from high growth valuations in 2H2021 to now value & defensive & commodity shares doing well in Q1.

Seems to me that while they can pick good quality companies, they have absolutely no idea whether they are over or underpriced.

The facts?

Cash as a proportion of the portfolio stayed steady from Jul21 to Dec21 (8.36% to 8.83%), implying during this time they felt their holdings still were fairly valued and also the market/opportunities valuation was similar in July vs Dec.

In their Mar fundsheet, cash is now 9.65%. So during the market meltdown in Jan and Feb, they've decided that their existing holdings were overvalued, sold down, and gone more cash!

One would expect a fund that pride itself in identifying Quality Companies for Long Term Growth, to have increased their stakes in their existing convictions when the price goes down. Otherwise it suggests that at the valuation highs in Q4 last year, they actually thought those prices were still good value.

Zipmanpeter

Re Non-standard Finance (LON:NSF) - sneaked out at 14.00 on a Friday, Non-standard Finance (LON:NSF) to ask " FCA to grant permission for Loans at Home to be placed into administration" . This might signal the end of formal, agent delivered "doorstep lending" after 150+ years.

A few years ago there were over 400 companies doing it, led by Provident (50% mkt share), Morses CLub (20%) and NSF (10%). Provident quit and wound down this year. Loans at Home are quitting now and Morses Club (LON:MCL) may need to do the same, hounded by Claims companies.

Although the business model was distasteful to some, used properly it delivered credit to parts of the market nothing else reaches. Some of the hundreds of thousands of poor users may migrate to fancy new tech solution, a very few to the formal banking system that never wants non-standard customers or under-funded credit unions.......and quite a lot will go back to back street lenders, with even higher rates, tough debt collectors without any 'forbearance scheme' or not be able to borrow at all.

I invested in this industry for return but also because 12 years in Nigeria taught me that sometimes, even at 'extortionate' rates, the ability to borrow was incredibly valuable to very poor people.

I will survive the loss but hope the FCA will be happy with the customer outcomes resulting from closing this industry down and allowing the ambulance chasers to win.

peterg

We're short on good news at the moment, so I thought I would share this post from the FT's statistician in chief who with Office for National Statistics data shows COVID is now less deadly than flu

Partly true, but as the author of the post says:

But of course, if we want to know the total toll Covid is having on mortality, IFR is only half of the equation.

A virus can be less lethal on a *per-infection* basis but still cause more deaths overall if it infects more people.

Which is why covid deaths remain far higher than flu deaths - covid, and omicron in particular, is far more transmissable.

MichaelFBS

Hi Broomeda

I don’t think you are alone, I am certainly in the same boat and my wife is incredibly supportive.

However, I gave questioned why at my stage of life, I am 60 (but feel 30 :- )) what I am doing loading up on small caps but was I also not slightly arrogant to think 10 years ago, when I started investing that I could out perform Warren Buffett?

My son’s JISA, which I run, is down 5.46% YTD and up 2.43% on a 12 month view (with only one piece of real luck, I sold half his PayPal at the peak after it had three bagged). The portfolio is in the likes of BRK.B (40% of the portfolio), JP Morgan, Disney, Fundsmith, Buffettology, Visa, LVMH, VUSA (S&P500 ETF). There are a total of 13 holdings.

I am pivoting at least half my own portfolio towards these sort of stocks (first purchase made last week in BRK which I will build on over the next 12 months and looking at various high quality US stocks whose prices seem to have come off significantly in the past few weeks).

I be still like my small cap holdings (you can see them on Twitter at https://twitter.com/mbroomsmith/status/1500900531975380999?s=21) but the volatility is too emotionally stressful for me and I need to reduce that.

Regards

Michael

cmpeckham

David, I saw your reply on Just from yesterday and responded.

KevinS1

This is a great weekly update and one I look forward to every Friday afternoon - they seem to get out a lot of updates on commonly held small-caps and do some deep dives into the announcements.

I think both of the writers are regulars on the usual Mello Monday and other stuff - Mark has written a great book and appears on MM. Leo was recently on sell it to the city - see PIWorld.

Great weekly update and some knowledgeable investors. I think they have also got a get together later in March for anyone interested.

TheFloatingInvestor

RajanP always found their spread high, and of course pretty much all construction seems out of favour with the market ATM. Having said that they do have a bit of volatility which maybe an opportunity to ride.

Been trading since November full time...spent 14 years in the military and T.BH this "journey" feels worse...I cant even dig a foxhole and hide :-)

But as I reflect, if I had had it easy at the start i would for sure be heading for deep water when it turned...Baptism of fire springs to mind.

davisj99

Hi Zipmanpeter

The RSN states that Loans at Home is to be put into administration followed by a capital raise to fund redress to customers as needed, and to shore up the Group's balance sheet (assuming it survives). Wrt Morses Club (LON:MCL) , do you think it likely that the proposed separation of HCC and Shelby Finance was intended to forestall just such a development, and that it was called off as the CCs began to circle?

Re Morses Club (LON:MCL) and the question "do you think it likely that the proposed separation of HCC and Shelby Finance was intended to forestall just such a development, and that it was called off as the CCs (claims companies) began to circle?" My answer is yes and I thought so at the time.

However, I thought the risk for Morses low enough to stay in since they had historically managed claims better, allegedly in line with all guidance (at least at HO level on systems) and there was no statement to the company to the contrary. I saw nothing in the independent reviews that spelled the end for the business and I thought the 'immediate harms focus' would be on KLarna like offers which have no forbearance system built in

The CEO suddenly scarpering and selling all his shares suggests he finally felt it could all go wrong but the damage was done.

Now, we have to see the value in the firm is the possibility that it is not the end (leaving Morses as a no doubt hugely regulated and supervised company but in a near monopoly position) or in the up to now loss making Digital business.

Value and demand s still there but whether the regulators will 'protect' it by controlling claims, I am not sure. (The likely cost of living crisis / recession that is coming I worry about much less for trhe business! This is a pure legal/regulatory risk evaluation) Unfortunately, for the wrong reasons, the business will have few easy friends.

Bouden54

Sorry but didn't find anything particularly insightful in these factsheets. Sounds like he is trying to justify recent poor performance. The fact is his funds for a long time have benefitted from huge multiple expansion in the so called quality/growth stocks and these had become petty expensive. The have simply de-rated to more sensible levels,but he's claiming the market is acting irrationality.

Brookeda

I am moving that way a bit. I'm still 47 so have a bit of longer life on this to run but have been active now for about 10 years. For the first few years it was a lot of fun but as the amount invested as grown so have the stress levels associated with it and that effects my relationship with my family at times , which I hate.

I decided to cap my smallcap investing to what I had in it last summer and not invest more. This year I have started adding but I am adding money into ETF's and the like because I need to sleep at night.

I need to have a place where I can longer term relax and let it get me 3-4% a year hassle free and then in maybe 5-6 years time I may have enough to stop working full time (but that's dependent on my larger stress of the company I work for having a successful IPO.)

Our mental health needs to come first and I like to think we on here can support each other on that.

homosap

Hi Brookeda, I note that you and Michael FBS mention your ages and that is a very relevant factor in investing because it influences how much we have emotionally as well as financially at stake. The 2008 market falls had a great emotional impact on me as at around 60 but retired with two sons still at public school and an outstanding mortgage to see a good proportion of my savings vaporised was hard.

While we have not seen the sort of falls that occurred then so far I hold a significant proportion of Russian and Ukrainian stock in my portfolio and I have seen falls in Boohoo, for example of of over 50% so my recent overall gains have melted away and been replaced by an overall losses on the year. However, so far in contrast to 2008, emotionally I have been able to meet this with Zen like calm and detachment simply because 14 years on I am nearer the ultimate loss - of life itself, my sons are nearer employability and my mortgage is paid off.

The other advantage of age is that not only can I compare myself with those suffering far greater privations in the Ukraine but also recollect that the comparative depravation of material things during my youth was never the source of any personal distress.

As you say mental health comes first and investment choices needs to be tailored to the level of stress that investment losses will impose on you should the worst happen, as from time to time it will. The level of stress will vary with your personal circumstances and that will be significantly affected by your age. In my view provided you are not totally reliant on your investments to provide a basic sustainable level of living age provides detachment, contrary to the conventional IFA view that safer investments should be sought as one gets older.

So all of you younger investors looking at losses (including Paul) have my greatest sympathy - I have been there - but with luck the advance of old age will in fact be accompanied by reduced stress. Something to look forward to as compensation for all the other aches and pains that come.

Lochinver

Thanks for this Michael - very interesting and another good source of analysis and opinion .

Quite an interesting take on Revolution Bars ( RBG) :

“So to remind you where we are, the company is worth less than zero on three metrics (balance sheet, EV/EBITDA, post-covid H2 EPS). But a limited company cannot be worth less than zero to shareholders. And it cannot be zero as there is always option value. Really crudely, the option value from something unexpectedly good happening has some relationship to sales with £150m seeming to be a reasonable run rate. So Leo is going to value it at £1.5m.”

I hold Loungers (LGRS) so I’m keen to see what cross over effect there may be. You do wonder if those operators with large estates are about to be pulverised by increased energy , staffing, ingredients and inwards distribution costs at the same time as consumers being stymied by horrendous cost of living increases.
So tough for all these guys - it’s one thing after another now, year after year and you wonder how they maintain enthusiasm. Good luck to all of them

Hi Brookeda

Yes it was easier with a smaller amount (mid five figues) and a raging bull market.

I had a 24% drawdown in 2014 but came back with 16%, 31% and 28% in the following three years.

My portfolio is 10 times bigger than it was in 2014 (business and property sales and savings) etc and though I keep telling myself to focus on the %age fall which is by no means distrasous I keep looking at the pound amount, which ..... with you head.

Thoroughly agree with you last paragraph.

Have a good weekend.

SaarfLondon

12th Mar '22

Bear in mind ,your good lady wife is in a profession that has an approx 70% failure rate at matching/beating their chosen benchmark - and clients (the masses) pay for this privilege.

We're all pre occupied with anchoring

Dose

Their analysis on Revolution Bars (LON:RBG) (I hold) is similar in that it’s utter rubbish. The whole thesis is so misguided that there’s just no point giving it any more energy.

Small Cap Value Report (Fri 11 Mar 2022) - MEAL, SRT, SHI

Paul’s Section:

Parsley Box (LON:MEAL)

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Paul Scott

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