Small Cap Value Report (Fri 12 May 2023) - ECEL, THG

12th May '23 by Paul Scott

74 comments 7315 reads

Good morning from Paul!

UK interest rates rose yet again yesterday, but as expected. I can feel another rant coming on for tomorrow's podcast.

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.

With it being a Friday, I'm off to a leisurely start. This is what I'm planning on looking at first -

Eurocell (LON:ECEL)

Down 12% to 112p

Market cap £126m

Trading Update (profit warning)

Eurocell plc, the market leading, vertically integrated UK manufacturer, recycler and distributor of innovative window, door and roofline PVC products, provides the following update for the first four months of 2023.

The current financial year is FY 12/2022.

I like this company, but am wary of the building supplies sector generally, as we’ve been discussing in recent weeks, with the brick suppliers reporting strangely upbeat trading, which was contradicted by a recent profit warning from Marshalls (LON:MSLH) . With housing starts sharply down this year, and repair/maintenance activity also said to be subdued, further profit warnings in the sector do seem quite likely. ECEL mentions both those points today, reinforcing a negative current sector outlook for building supplies companies.

But, at some point I think we’ll have a nice entry point for several decent companies in this sector. After all, trading is likely to recover at some stage, and when we own shares in…

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joshwood976

12th May '23

Sosandar (LON:SOS) 12 May (today) downgrade for reference

cheeky_minnows

A very thought provoking post.

Although perhaps I view the situation slightly differently, a lot of what you have put chimes with me. My view is that trying to catch up on things that are already lost is not efficient. Much better to try and to move straight to the next stepwise technological advance. In addition to your list I would add automation, genetics and a wide range of renewables.

As a country we have lost much of the manufacturing base that existed when I was doing my sandwich course back in the day. The level of investment required to regain that level of expertise is not possible, especially in the private sector. Luckily there are a few areas of strength that are left, and you mention Rolls Royce, Renishaw and quite a lot of biotech (but that is not my area of expertise). I have watched the slow theft of companies’ intellectual property by the ‘outsourcing’ model popular over the last 30 years. And it is not only in the UK, European, and US firms have all been jumping on the bandwagon of cheap labour at the expense of losing their long term competitive edge. It wasn’t long ago that a Chinese customer that my project manager visited showed no shame in displaying carbon copies of our equipment whilst pointing out the defects in our own.

In my experience the type of R&D that we are talking about here is a hit and miss affair, where one has to be willing to accept that only a small percentage of the time and money invested actually bears fruit. This is why most of it is done by large companies where the budget is available, and at the first sign of an unfavourable RNS, well, the scissors have to come out and snip, snip.

It is my opinion that the UK does have an innovative streak that is difficult to quantify, perhaps a level of individualism (which is why I think that the UK music sector is so strong). In recent history it has proven difficult to harness this innovation, and I fear that it will only become more difficult if our next generation do not have the necessary exposure (and I mean work with) the most cutting edge technologies available – that in my opinion is where the future lies, and perhaps where our government (of any colour) could help out.

I would say that as another available axis, our historical links (good & bad ;o) with India might be a point of strength that would be difficult to match for many other countries. Maybe where China is falling off, India is hungry to take its place. We could always ask our prime ministers wife to pick up where Mrs Truss left off …

Raleigh4343

Maybe. Check margins against other etailers. This drifts. It will be news driven. LTBH IMO.

Yep

ed_miller

Re: Accessing Stocko App on Android

For me, I have to click 'Log On' every time, and when I do, it takes me to the Home page (my log-on settings are set to 'remember this computer/phone').

peterg

Yes, reported and apparently they are trying to fix it.

Short term fix, that seems to work here is to reclick the link (mine is to https://www.stockopedia.com/di...) once you get the "logout" page, which then takes me to where I want to go, with out logging out and in again.

TEIN

Vertu Motors (LON:VTU) (I hold) - thanks Tamzin, what a great presentation and Q&A. One of the things I like about the combative Robert Forrester is that his team has to be really sharp to keep up with him, and in Karen Anderson you have exactly that in my opinion. Her presentation was excellent - there are a lot of moving parts to Vertu and she seems to be firmly behind the wheel (excuse the puns) on the numbers. Well done for making a results presentation so entertaining. Maybe you should lanuch a 'results presentation of the year' award!

Rusty2

Some director buying at Luceco (LON:LUCE) has lifted the share price in the afternoon.

BnB

13th May '23

To me, the obvious answer to our moribund economy is wind power - and lots of it, with a meaningful tilt to offshore but a recognition that onshore is not a blight but an asset to communities, perhaps through local participation in production. Strong economies derive directly from energy abundance and we have exceptional natural resources in this regard. The North Sea states have huge potential to form of nexus of energy generation, distribution and expertise that is as significant to Europe as Arabian Gulf or US oil and gas are today, and which, together with appropriate back-up, would assure our energy security in perpetuity. Yet it takes as much as 5 years to even get a project approved. Global giants are queuing up to participate and some of them are even British! To think it’s only a matter of planning policy. Madness!

davidallen77

I click on favourites link in bookmark bar and goes straight to page

It is already happening, Dogger Bank will be the largest offshore wind farm in the world, the first part is due to start production this summer and the completion is due to be in 2026. There are many other offshore windfarms in the pipeline. Wind in the last quarter over took gas for the first time ever in electric production.

All of which is encouraging and I’m well aware. But why the obstructive planning grind and when will those in the south of England accept that wind turbines are a social and economic good? How about some statutory regional variations in electricity cost according to generative capacity to sharpen people’s focus? The SW peninsular excepted, it’s not even as though there’s any decent English scenery to blight south of Derbyshire! ;-)

SCI20

Robert Forrester is a no nonsense straight talking leader who inspires confidence.

mojomogoz

Re wind power...I'm happy with it and happy to have more...

...however it is categorically not the solution and it is scientifically as well as economically illiterate to believe so. In fact, I would go as far as to say that policy support for more wind is a waste of time, resource and capital. Wind is a nice to have where the non-manipulated economics supports it. Fortunately, the UK is one the most ideal locations in world for wind power due to climate and geography so unaided 'private capital' has the ability to make productive investment here. BUT wind generation should bear the full marginal cost of its use. That means grid alterations to accommodate this very diffuse and variable energy source, storage solutions, pricing and managing the over saturation of generation markets driving down price for energy when wind is over abundant and cost of its intermittency to the system (when the wind doesn't blow the system/society requires 100% alt generation capability). These issues are not seriously discussed (yet) by policymakers and proponents of wind...tho that process is starting globally. They seriously limit the societal value of lots of wind generation and particularly disable it as anything other than a marginal energy source.

I view wind as a sort of hybrid of energy storage plus surplus energy generation capability. Storage as it takes energy and materials (both carbon input intensive) and 'stores' it in turbines and supporting infrastructure to be released at later point (when the wind enables it). Then where the turbine and infrastructure outlives the total energy input cost to make it it then gives us bonus excess energy. Its hard to know for sure how much excess energy return on energy input we get but it is clearly much less than alternative very energy dense sources (note, energy return on energy invested is the key criteria...our affluence as a society is 100% dependent on it...if you don't understand this point you need to give it very serious contemplation).

Nuke is the best energy dense alternative we have. Carbon sources have been deteriorating as our reserves of it are less high quality as we move through them. To be over simplistic, 50+ years ago we got something like 100 barrels of oil for every 1 barrel invested in producing it. But today new oil sources come in at a much lower energy return on energy invested, though still significantly better than wind if full costs loaded onto wind eg, full back up generation and/or long term power storage (...which tbc we are nowhere near solving at a societal scale).

So, I could go on in more depth and be a greater bore....but wind is not our solution. It can be a contribution but it is by definition marginal in absence of a huge leap forward in storage - many weeks, possibly months, back up required and in a super dense format...material science may get there but we are probably significantly further away from that than we are from solving fusion generation...just to give a comparable panacea.

Really our only viable scalable alternative to carbon based energy for grid power that we currently have the knowledge and capability to build is nuclear. FYI I've got c.25% of my portfolio exposed to this but actually not for the 'nuclear renaissance' that I view to be near certain and is actually happening globally but as nuclear power is a deep capital cycle play and just maintaining and fuelling current generation abilities has been super underinvested in, meaning that significant price rises are required to produce enough fuel to replace fuel used...the renaissance in nuke as a true energy alternative if/when it happens is potentially just mega speculative upside. Nuke is the greenest AND safest energy source available to us (...if we take facts scientifically rather than emotional reasoning that is).

As for other alternatives, we should invest heavily in geothermal and tidal rather than wind or solar. The UK is fortunate as the proximity and shape of our coastline means that tidal potential is 'abundant' in UK. In geothermal we are less luck as its not near surface. Both require significant leaps in tech. Tidal potential is probably relatively limited. But geothermal is pretty unlimited if we can develop the technology/materials to withstand heat and pressure 2km plus in the earth's crust. Geothermal is v exciting at the point we work out how to harness it. IMO this is an engineering problem we will undoubtedly solve if we seek to do so....whereas batteries of scale and power may always prove out of reach

Samsgrandad

Many a true word TEIN. Our beloved country seems to be emulating the fall of the Roman empire in that there isn't a lot to chose between contenders for government so the masses are maybe voting for more bank holidays and caring more about football than work prospects.

ettrader

14th May '23

Eurocell (LON:ECEL). To be honest I'm annoyed about this one because it's obvious investors have been misled. I'll explain. On the 16th March 2023 the CEO said this:

"We continue to take market share and have increased the run rate on new
fabricator account acquisitions, with our pipeline of other potential new
customers remaining healthy. Market share gains are further supported by the
impact of maturing branches and a widening product range, all underpinned by
very high product availability and increasingly efficient operations.

"For the current year, the latest construction industry forecasts((5))
recognise the currently challenging market conditions and ongoing
macroeconomic uncertainty. However, we have acted swiftly on cost to prepare
the business for 2023 and we expect our strategy to enable us to optimise
performance in our markets."

The trading update is up to the period of 30th April 2023 (6 weeks later) that mentions some significant issues that contradict their forward guidance. My gut feel is he's misled the market.

These are the key points:

* ECEL forecasts adj profit before tax for 2023 to come in
below current market expectations

** Co posts 2% decline in group sales for four months to
April 30

** Says trading volumes during four-month period fell due to
weakness in repair, maintenance and improvement (RMI) and
building plastics division

** ECEL continues to experience cost inflation, particularly
for electricity, co says

** Co adds feedstock prices for its recycling plants are
higher than in 2022, while PVC resin prices have "fallen back
slightly this year but remain volatile"

Eurocell (LON:ECEL) Well he did buy some shares recently, so I'm not sure he did mislead, if he knew that why buy the shares? Other directors were also buying shares in April, 23.

I don't hold but have considered it in the past.

I'm reducing my holdings in this sector. Tyman (LON:TYMN) update is out soon, be interesting to see how they are doing.

There’s nothing misleading that I see in the statements quoted. He talks about market share gains, not outperformance vs targets. And experienced investors will understand that “a focus on market share gains” is a euphemism for making the best of trading below earlier expectations.

marigold

15th May '23

Could you email our MPs please as they do not seem to understand the implications of net zero mostly achieved by sun and wind.

Haha. I'm a member of a party and I emailed the leadership about my lack of support for their approach to energy. I'm still waiting on a response...

Small Cap Value Report (Fri 12 May 2023) - ECEL, THG

Eurocell (LON:ECEL)

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Paul Scott

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