Small Cap Value Report (Fri 17 Mar 2023) - DFS, FNX, DOTD, RCH, NWOR

17th Mar '23 by Paul Scott

84 comments 8095 reads

Good morning from Paul!

This week's "mystery share" for my podcast (i.e. my best value/GARP share of the week) is Eurocell (LON:ECEL) - also note that there was a decent -sized Director buy as well.

Very quiet (nothing, basically!) for small cap results/outlook today, so I've done a proper dig into figures from DFS Furniture (LON:DFS) from yesterday, and a few quick comments below from brief reviews of other value/GARP small cap results which caught my eye earlier this week.

Today's report is now finished. Thanks for reading/contributing, and have a lovely weekend!

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.

Agenda - there's no news today of interest, but I've got masses of backlog items, so will work my way through that list, until about 1-2pm finish time today.

Paul’s Section:

DFS Furniture (LON:DFS)

133p (y’day’s close)

Market cap £311m

Interim Results

DFS Furniture plc, the market-leading retailer of living room and upholstered furniture in the United Kingdom, today announces its interim results for the 26 week period ended 25 December 2022 (prior year comparative periods are the 26 weeks ended 26 December 2021 (H1 FY22) and the 26 week unaudited pro forma period ended 30 December 2018 (H1 FY19)).

I think it’s getting too complicated, and largely irrelevant now, to use pre-covid comparisons. Too much has changed (particularly big…

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Harry Hindsight

17th Mar '23

AJBell did a funds webinar yesterday. Ben Rogoff of Polar Capital Technology Trust (LON:PCT) impressive straight talker. AI (ChatGPT etc) the future requiring data, processing power so favours semiconductors. Advanced Micro Devices (NSQ:AMD) is a volatile one if want to play trader.

gari en desti

I'm waiting for Saga (LON:SAGA) to start falling and top up. It's quite a dip down. Wonder if there's something we don't know? down another 8+% so far today.

Paul Scott

Hi simmsc,

I've also been keeping an eye on Volex (LON:VLX) with a view to buying a few for my SIPP. However, I held back because my strategy is usually to only buy after a recent, acceptable trading update/outlook statement. In this case, whilst I like Volex as a company, it hasn't updated the market since 9 Nov 2022 when interims were released. Given all that's happening in the world, leaving a gap of well over 4 months now to update shareholders & the market generally, is just too long.

I think all companies should be required to issue trading updates at least quarterly, stating whether they are trading in line with expectations or not, and what the average daily net cash/debt position is.

Rather than giving precise guidance figures, I think all companies should give quarterly guidance on the expected range of possible outcomes for the full year. If that's a wide range due to uncertainty, fine. This would also give us a good way to measure how accurate or not management guidance is over the long-term.

All too often, especially in downturns like now, when I see a share price consistently drifting down, and a long delay in news on trading, a profit warning suddenly appears, and the share price gets a second bash. A good recent example was Wincanton (LON:WIN)

Equally, sometimes companies come out and say everything's fine, so we never really know what's going on, hence why more frequent trading updates really are needed.

With Volex, it concerns me that the share price went into a noticeable downtrend in February, when many other small caps were enjoying a short-lived bounce. That worries me - why was it bucking the trend? More sellers than buyers obviously, but the risk is the seller(s) might know something we don't (that trading could be deteriorating).

As regards On Beach group (LON:OTB) I'm not so worried. We did comment here that it was looking over-stretched when it was knocking on the door of 200p. It's now down to 141p, in what strikes me as looking like a general market wobble, rather than anything company-specific.

OTB last reported on 27 Jan 2023, which I covered here saying that the TU was a bit vague, and maybe profit taking at 190p might be a good idea after a good run?

Broker forecasts have edged slightly up in the last 2 months on OTB.

My other question, is why are they using such an awful TV ad, which seems to be on constantly, with an obese child going crazy at the sight of a help-yourself buffet!?

Regards, Paul.

Tortoise investor

It's down a lot - I think a combination of market nervousness (Saga's high debt probably makes it more prone to moving on market nervousness) and also following a failed attempt to sell its underwriting business. But as you say it's down particularly today so I don't know if there is some other news I'm not aware of too.

Snowbum

Despite being happy to hold and invest in gold miners, I’ve always avoided Centamin (LON:CEY) as the mine grades don’t cut it for me. There are many better alternatives imo. One of my largest holdings is Shanta Gold (LON:SHG) .

Lucky dip

some banks are easier to understand like Close brothers. at around £9 I think it is reasonable priced. diversified and paying good dividend.

Roger Baron

Hi Paul, don't know if it is just old age slowing down my eyes and brain function, but the interesting quotes that appear when I log on seem to now disappear a fraction of a second before I can read them!

Michael Tee

Hi JASVFS

Re: Equals Group. (LON:EQLS)

I also read Mathew Long FCA letter regarding risks posed by payments groups.

As well as concerns about the risks Matthew also says in his letter that he welcomes:

"the competition and innovation we have seen in the payments sector and the improved choice, convenience and value this can provide."

So it seems to me that the cowboys are likely to be in the firing line which could be well be beneficial to the professional companies in this arena.

I hold Equals.

sharw

Re distributable reserves and divis,

Paul - Lookers (LON:LOOK) was one who had paid illegal dividends because they had failed to upload the cash from subsidiaries to the parent company:

from https://www.lookersplc.com/med...

Rusty2

Close Brothers (LON:CBG) someone commented on here the other day that they had taken more risky investments recently. I don't hold.
They are often among, the highest interest rate paying accounts you can get, I have some savings with them.

Yes Close used to be pretty focused. They charge high rates, but not as high as other niche lenders. However, they diversified under new leadership a few years ago, into financing legal cases and got into all sorts of trouble. Massive losses there. They are now selling/ closing down those terrible purchases to get back to what they do very well, which is to charge high rates to finance property developers etc.

gmtrader

Problem with Shanta Gold (LON:SHG) is there is a seller and I’m not sure investors really trust Eric Zurrin.

Sorry, think you misunderstood my comment, I said pay high interest not about lending rates, which maybe so. High interest rates on savings, tend to fixed rate, long term bonds, ie 1-5 years, these will be low risk, as you can't withdraw the money. I will have look more into Close Brothers (LON:CBG) . Thanks for the information.

Michael C

One of the problems with Close Brothers (LON:CBG) (I used to hold) is that they have been under-providing for the disastrous investment in their specialist legal finance arm, Novitas, which they are trying to extricate themselves from. From the RNS Tuesday:

Half Year Results for the Six Months to 31 January 2023 "...significantly impacted by the increased provisions in relation to Novitas, as announced previously in January 2023. .... additional provision of £89.8 million, with the total provisions in relation to Novitas taken in H1 2023 at £114.6 million. As a result, statutory operating profit before tax decreased to £11.7 million (H1 2022: £128.9 million). Excluding Novitas, adjusted operating profit decreased to £117.5 million (H1 2022: £160.5 million)

I feel queasy about the increasing provisions for Novitas and I don't know if they are able to draw a line under this mess. Perhaps they have finished making provisions, but perhaps not, and I suspect the market thinks not.

And there's this: Although underlying credit performance remains resilient, the increased uncertainty in the economic outlook has been reflected in higher forward-looking impairment provisions and a rise in arrears in Motor Finance. As a result, the annualised bad debt ratio (excluding Novitas) was 1.1% (H1 2022: 0.2%)

Also they are lending heavily for BEVs (electric cars)....with over £90 million lent in the first half towards our ambition to provide £1 billion of funding for battery electric vehicles over five years - what are the residuals going to be like in a few years' time?

And they are getting into Buy-to-Let bridging finance:- ...successful piloting of a specialist buy-to-let extension to our existing Property bridging finance clients Hmm. The government's Bill to "reform" B2L is expected this session. It will abolish "no fault" s21 repossessions and introduce rent controls for the first time since the Housing Act 1988. The government says there won't be rent controls but I've read the papers, and submitted my own paper which was included in the post-consultation report (my name is in the footnotes), and I say they are going to introduce rent controls. Labour say they will ban evictions for non-payment of rent if they win the next election. I wouldn't lend against B2L myself.

The best they could say about Winterflood is: Winterflood's performance continued to reflect challenging market conditions

Close Brothers (LON:CBG) is a "good" business, it's done well in the past, and it's not going bust. I wouldn't buy myself at the moment and I'm glad I sold at 1100 on 9 March.

martinck1

Like you Nick, I sold my holding in Centamin (LON:CEY) yesterday. I quite liked the company, wanted exposure to gold and thought the management explained their business well on the calls. But over 6 months the company never answered a few simple questions, which they promised to deal with.

Interestingly enough, one of these questions was on the payments to the"non-controlling interest in SGM" which are shown in these accounts FY22: $35.5m (vs turnover of $788m), FY21: $75.2m (vs turnover of $733m). I couldn't get my head around why they were so different. There is some sort of explanation in the announcement, but it is one of those where you have to understand in the first place and doesn't show how to estimate these payments.

Also I don't understand mining enough to judge the "stripping activity" which is capitalised and on the balance sheet at the end of FY22 at $141m FY21:$59m). In my world it certainly makes an EBITDA number meaningless.

nettle

I couldn’t agree more. So I send this from Uganda! Warnings are just as valuable as recommendations.

cjg

I agree with your view that Fund managers look cheap - although they may get even cheaper in the short term!

I have built holdings in:

Impax Asset Management (LON:IPX) - forecast yield 3.6%

Liontrust Asset Management (LON:LIO) forecast yield 6.9%

Polar Capital Holdings (LON:POLR) forecast yield 9.9%

The ROE and ROCE stats are pretty impressive for all three (30-50% figures) and i think on a 2/3 year view with inflation hopefully falling back to 2-3% in that timescale i believe they represent an attractive opportunity.

Given they are geared to the stock market the share prices are likely to be volatile as seen over the past week or so. The other risk is of a dividend cut in the short term to conserve cash.

Butch5amue1

18th Mar '23

Tom,

If a UK resident wants to purchase Ryanair shares there is an alternative. They can be bought on the US market (RYAAY). I bought some in the last 12 months through Interactive Investors.

Caduceus

Liabilities are the amount of money that an organization owes to others, such as pensions that will be paid in the future. To calculate these liabilities, we use a number called the discount rate. The discount rate is based on how much money we could earn if we invested the same amount of money today. If interest rates are high, then the discount rate is high, and if interest rates are low, then the discount rate is low.

When we use a higher discount rate to calculate the liabilities, it means that we expect to earn more money in the future, so the amount of money we owe in the future is worth less today. In other words, using a higher discount rate reduces the amount of money we owe in the future (the liabilities), which reduces the deficit.

So, if interest rates rise, the discount rate used to calculate the liabilities will also rise, which means the amount of money owed in the future will be worth less today. This, in turn, will reduce the deficit because the amount of money we owe in the future is now lower.

What, the, actual, ****?

£15 mil worth SVB Bonuses paid out days after bailout news.

Small Cap Value Report (Fri 17 Mar 2023) - DFS, FNX, DOTD, RCH, NWOR

Paul’s Section:

DFS Furniture (LON:DFS)

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Paul Scott

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