Small Cap Value Report (Fri 13 Apr 2018) - Part 1 - XPP, LWB, IPX, RFX

13th Apr '18 by Graham Neary

26 comments 10994 reads

Good morning! It's Friday the 13th.

There aren't a huge number of exciting news announcements today, so I'll probably circle back to announcements from earlier this week. Paul is also doing a bonus report to cover Trakm8 Holdings (LON:TRAK) and some stories he missed during the week. His report is at this link.

Announcements today:

XP Power (LON:XPP) (trading statement)
Low & Bonar (LON:LWB) (trading update)

Announcements from earlier this week for financial stocks:

Impax Asset Management (LON:IPX)
Ramsdens Holdings (LON:RFX)

XP Power (LON:XPP)

Share price: 36.50 (+4%)
No. of shares: 19 million
Market cap: £701 million

Trading Statement

XP Power makes and supplies a wide range of AC-DC power supplies and converters worldwide.

It has been a high-performing stock and is now beyond our traditional market cap limits for this report. Some of our readers continue to hold it from lower levels, so I like to keep an eye on it!

This is just a short update for Q1, keeping us updated for progress to the end of March. The most important point is probably that expectations for the full year remain unchanged.

The Company has made a good start to the new financial year as the strong order intake reported in 2017 continued into 2018. Order intake in the first quarter of 2018 was £51.2 million (2017: £47.0 million), 9% ahead of Q1 2017 on a reported basis or 19% ahead in constant currency.

On a “like for like” basis, removing currency effects and the impact of the Comdel acquisition, orders increased by 12%.

All of these growth rates remain encouraging. I think the 12% number is the most important one - this is the organic growth rate at constant currencies.

We can see that a strengthening pound is hurting the reported figures, with a 10% negative disparity between reported growth (9%) and constant-currency growth (19%).

Let's compare the above statement on order intake with the equivalent one from a year ago, in April 2017:

Order intake in the quarter was also very encouraging at £47.0 million (2016: £30.3 million), up 55%…

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Graham Neary

13th Apr '18

Cheers Julian! Yes, it makes sense for me to cover both of those stocks. Thanks for the suggestions and for sharing your thoughts on them. G

Hi John, you're welcome. Yes, it makes sense for me to go back and look at Ramsdens Holdings (LON:RFX). Cheers. G

nicobos

Trakm8 Holdings (LON:TRAK)

Be wary, very wary, of RNS's that obfuscate the facts. All I hear is excuses...

If the results were that decent they'd spell things out in plain English and be shouting from the rooftops - 'significantly above expectations' etc.

doug2500

If you're commenting on Impax Asset Management (LON:IPX) Graham, I'd be really interested in your views on this sector in general as so much of it looks so cheap.

The valuations of Impax Asset Management (LON:IPX) Cenkos Securities (LON:CNKS) and Numis (LON:NUM) all look attractive to me but the market obviously does not rate them too highly. Most of them are on good yields and (what looks to me) strong balance sheets so what am I missing?

Thanks

jonno

Many thanks Graham.

davidjhill

Lol. I had no beers last night and am in the same boat as you. This is a ridiculously obscure trading statement from Trakm8 Holdings (LON:TRAK)
Looks to me like this is hinting at a circa £1m revenue miss against analyst expectations, so pretty marginal but not brilliant on the face of it. However, the statement also says some contracts pushed into Q1 and recent order on the "optional" insurance products is strong, so actually not a bad result if it gives a growth lift to next year.
I am therefore looking for somewhere around £31m revenues and 7p eps. If debt is coming down at least it also means positive cashflow is now being generated.

With growth rates at 25% hard to see how they are worth much more than 110p for now. If they keep those growth rates up for a year or two I can see upside from there (maybe 150p??) but this seems to have shifted away from ever being an explosive growth story.

Anyone disagree?

sheeza

Yes,Crimson Tide (LON;TIDE) - be interesting to know what others think

TheWatchmaker

I agree with your general comments on the Impax Asset Management AUM announcement earlier this week.
I was hoping for the growth in AUM to have stepped up in Q1 but instead they seem flat. This suggests to me that efforts have been focussed on bringing PAX into the company and taken focus away from further growing AUM. It will be interesting to see where the AUM stands at end of Q2 - whether the growth stall was a blip or not.

Chrisfarrell21

"Profit, EBITDA etc of no concern to you, shareholder."

Excellent. And, sadly, true.

Aislabie

I hold Crimson Tide (LON:TIDE) and am happy with the progress. As a small company there are inevitably risks that can overwhelm you but TIDE seems to be doing things right. They are investing in the growth of their platform but they are doing it with their own cash flow which looks like a good way to go. If they start large borrowing or issuing lines of discounted shares, and these sort of companies get sorely tempted (see Synety/Cloudcall!), I would be concerned.
Barrie Whipp as the founder has stepped aside to let a new CEO take the reins and this looks a good succession plan sign to me.
This is a tiddler of a company, and will be for a while but with patience it can prosper (and so can I !)

gus 1065

Hi Graham.

Thanks for the write up on Low & Bonar (LON:LWB) . One observation I’d make is that this has gone from being a Super Stock to Value Trap pretty rapidly falling from a SR of 92 in Sept 17 to the current 33 even before the current lack lustre trading update is taken into account. Link here to the front page report from last September for a comparison.

http://reports.stockopedia.co.uk/1080061/Low___Bonar_LSE_1080061_20170902.pdf

I’ve been monitoring my portfolio for about about a year now logging the various stock rank components/styles and I’ve been surprised as to just how volatile these seem to have been for many individual stocks (especially the small caps). Lesson I take from this is the importance of monitoring any kind of “blind” factor invested NAPs portfolio pretty closely as deteriorations can come pretty quickly. (Also, as a prompt to Ed and crew it would be very useful to be able to chart historic SR and components for individual stocks within the Stockopedia framework itself if possible).

Gus.

ACounsell

Gus,

Agree with your sentiment re charting historic stock rank and components. All the data is in the system (under archived stock reports feature if no where else) so it should be straightforward to do. As you say this would be very useful if running a NAPs portfolio as the 'qualifying' shares (using Ed's methodology) are very volatile - by the end of the 1st quarter only 30% of the original picks remained.

On a related issue concerning the Guru screens, which are re-balanced quarterly, the often impressive historic returns will be inflated due to to the absence of trading costs. Investing £2,500 in the 20 NAPs selections for 2018 and assuming trading costs as per a typical platform selling the non-qualifiers and replacing them with the new qualifiers at the end of the 1st quarter would have cost £3225 (or 6.5% of the original investment) in losses on holdings and trading costs. This excludes the trading costs of setting up the NAPs portfolio at the start of the year. Replacement shares would have to perform pretty well in subsequent periods to recover this loss. This might be why Ed only re-balances half yearly and arguably, at least for last year, shouldn't have re-balanced at all!

re: Low & Bonar (LON:LWB)

Hi Gus, thanks for mentioning that. Good to see you are switched on and keeping a close eye on things! I'm sure Ed & Co. will take that on board.

Hi doug,

re Impax Asset Management (LON:IPX), I've covered it in the report above.

re: Cenkos Securities (LON:CNKS), Numis (LON:NUM). I see that the Cenkos valuation in particular is very low. These are people businesses driven by fee-earners and so investors are sceptical when it comes to awarding them normal valuation multiples. How do you build a long-term competitive advantage and compound profits when your top earning assets are living and breathing human beings who are free to retire or set up their own company whenever they want?

The other thing is that these companies are vulnerable to the whims of market sentiment. If investors don't want to take part in many IPOs in 2020, that largely determines how the year will turn out financially.

I like Cenkos Securities (LON:CNKS) and have owned shares in it before, but I think this is why it (and similar companies) tend to be cheap.

Best,

Graham

Nick Ray

I see Low & Bonar (LON:LWB) has gone from Q64 V85 M80 (SR92) in Sep/17 to Q30 V82 M12 (SR33).

For me the mild danger sign would be V85. Although the SR rewards high V, I have found that 25

Vsihv

I would strongly support the ability to look at both the underlying financial information, ratios and the stockrank report/scores/analysis on a historic basis.
Would extend this to historic guru screens as we could run analysis / changes against investment strategies.
I am trying to build some analytical / programming expertise (very early days!), and it would be super helpful if we could connect to Stocko through an API to download the information.
Whether Stocko's data providers would allow that is a whole other issue.
At the moment getting data from stocko is too manual and trying to get software to read the historic PDFs in a meaningful format is beyond my current capabilities!

re: Crimson Tide (LON:TIDE)

Hi tabhair, it's my first time hearing of this company, it's on my radar now at least. Sorry I didn't get round to it today, but I'll keep it on the radar. Cheers.

Apologies all - not a small cap related question, but portfolio mgt in light of Graham's newsletter:

Graham,

I saw your newsletter today talking about % invested vis a vis the level of the FTSE 100.
I was wondering whether that was based on gut feel or analysis and why you chose the FTSE 100?

From reading the letter, I think it was basically a strategy to forget about allocation, so perhaps my comments below are all moot, but since there are no stupid questions, only stupid people, here goes:

Without knowing the full details of your portfolio, would you suggest levels of FTSE 100 are appropriate basis of comparison versus your investment universe?
Basically, if it is not the right benchmark to monitor performance, would it be the right benchmark to base asset allocation?

If we are looking at general market levels, would FTSE All World be worth considering - since global investment flows are pretty correlated, especially with FTSE 100, which is a very "international" index?

Where might macro / interest rates fit into this - very simple theory being as interest rate tends to zero, Multiples tend to infinity.
By looking at historic levels without considering the macro (fair, as look through the cycle) and interest rates (less fair I think due to lower cost of capital and therefore all things equal, higher economic value added), we effectively need to allow for a higher P/B multiple (assuming market value and intrinsic value are perfectly correlated, which is clearly not the case.

Sorry that is all rather long winded!

Also look forward to your thoughts on Ramsdens Holdings (LON:RFX) - its one of my better performing holdings!

Many thanks,
V

Hi V, yes I think the FTSE-100 is a good comparison. The FTSE All-Share would be even better (I compare my performance against FTSE All-Share Total Return). They track each other closely.

If I was investing in global equities, then I would use the FTSE All World or similar.

I'm not sure I understand the second part of your question, but yes, I could adjust the decision based on interest rates, e.g. the 10-Year Treasury Yield. That's a good example of the sort of extension I might make to the plan. What I have for now is a really simple (maybe even stupidly simple) plan which I can build one.

Thanks for the question and I hope this helps.

clarea

14th Apr '18

Hi Graham,

See you are now getting into seminars and you will no doubt be a worthy addition.

Have you thought of penning a book yourself maybe with worked examples of your trades linked to Stocko, Simon Thompson did something along these lines a few years back but it was in my opinion a bit heavy going for the layman.

Thanks

Small Cap Value Report (Fri 13 Apr 2018) - Part 1 - XPP, LWB, IPX, RFX

XP Power (LON:XPP)

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Graham Neary

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