Small Cap Value Report (Fri 18 Dec 2020) - TCM, UCG, MUL, RTN, SAGA

18th Dec '20 by Paul Scott

121 comments 11989 reads

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

Timing - I've got a conference call with management of a company at 14:00, so there might be a gap before I look at the next company here later, Fulham Shore (LON:FUL)

Please note that I did a detailed section on Revolution Bars (LON:RBG) (I hold) late last night, as it took hours to plough through a complicated & very detailed results statement. If you're interested, here is the link to yesterday's full report, including RBG. I might do a shorter summary here later. Or just skip to the "My opinion" part in yesterday's report if you don't want all the detail.

Furlough Scheme

It's been announced that this has been extended again, from end Mar 2021, to end Apr 2021. That's helpful for companies/sectors under pressure. Although we saw yesterday, highly critical comments from bosses of Wetherspoons & Rev Bars (I hold) about Govt policy.

Telit Communications (LON:TCM)

Swiss tech company u-blox announces that it's got an extension to the Takeover Panel's put up or shut up [rule 2.6(a)] deadline today. It now has until 18 Jan 2021. Talks are continuing. Sounds like u-blox wants to strike a deal with Telit.

United Carpets (LON:UCG)

(I hold, a very small position)

De-listing & tender offer.

There's no point in tiny companies maintaining a stock market listing, if there's no realistic chance of growing into something more substantial, and nobody is interested in supporting fundraisings. UCG agrees, and announces today that it's de-listing. Usually a disaster, as that can trigger a c.50% instant share price fall. Not in this case, I'm pleased to say. The controlling shareholders are offering to buy out minority shareholders at 6.25p, a c.19% premium.

I'm happy with that, and will take the money rather than holding shares in an unlisted company.

Although on second thoughts, I note that the tender offer is being funded from the company's own cash! Therefore it might make more sense to keep my shares, and hold a bigger proportion of the company, for free, holding out for a better future price, and/or receiving divis in future from when it's a private company. I think management seem ethical, and hopefully would not run the business in a way which is detrimental to minority shareholders.…

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Thornabian

19th Dec '20

Ted Baker (LON:TED) is another small cap firmly classified in the value camp but with an excellent distinctive brand and all new management who are doing a very good job of the turn around, with clear KPIs and progress on them.

I think their growth has plenty of potential for upgrades and I think buying UK brands is very fashionable at the moment too.

timarr

My (c)onservative libertarian free-market instincts tell me that the more The State meddles and interferes in the micro details of the private lives of citizens, the worse the situation generally is.

I’d agree. However, the free market is a human construct, CV-19 is a coronavirus, these are different classes of things. Free-market economics starts from the principle of individual self-interest, it’s unclear how that would result in mass self-regulation when there’s a delay and disconnect between action (teenager going to an illegal rave) and consequence (grandmother dying like a goldfish out of water two months later).

I keep looking at Wuhan, where this first started. People are thronging the streets, business is humming, economic recovery has already happened. They went for 100% elimination of the virus whereas we went for summer holidays in the Costa del Sol.

Sometimes, temporarily, we need to set aside self-interest and personal freedoms for the greater good. Instead of which we’ve had our government flip-flopping between tightening and relaxing restrictions without a grand plan – an approach pretty much guaranteed to help the virus mutate into something more effective. Our scientifically illiterate leadership is fighting a virus with slogans.

So here we are. Hospital beds filling up, a faster variant of CV-19 on the loose, people dying when they’re weeks away from a vaccine, businesses failing when they’re weeks away from being able to reopen, another lockdown all but inevitable. Utterly predictable. Utterly frustrating.

matylda

Paul - Appreciate the Joint Broker commentary - Much appreciated - Wishing you a great Xmas and New Year - Hopefully get to catch up sometime in 2021, and hopefully at a record attendance Mello (no cycling home allowed!)

simoan

Brilliant, timarr! Nailed the whole damned mess in one short post.

All the best, Si

... I am convinced we need a cull of idiots in official positions.

Whilst I agree with the sentiment, I think we need to understand why such idiots manage to get into positions of influence in the first place. It happens all over, including quite obviously, Her Majesty's Government. We really need to look to behavioural science for the answers. It tells us that most people can't tell a truly competent person from a "confident idiot" i.e. people that suffer from the Dunning-Kruger effect. And the Peter Principle also applies - people are promoted to their level of incompetence.

To quote Dunning himself: “the knowledge and intelligence that are required to be good at a task are often the same qualities needed to recognize that one is not good at that task.”

All the best, Si

Paul Scott

Hi Peter,

Yes, advisory stuff is another good point, re M&A. Thinking back, this was mentioned by my city contacts, but I failed to write it down on my pad, apologies!

Perhaps with the separate business operations and a cruise operator taking a stake earlier this year maybe there's some pressure to hive off one of the divisions.

Re SAGA - my view is that the big shareholding & new Chairmanship of former long-serving CEO (and founder's son), Roger de Haan, is probably now a blocking stake, and I don't think anyone will be pressurising Saga into doing anything!

Give it a couple of years, and I think this stock has multibagger written all over it. The current valuation doesn't make any sense at all, especially once travel has re-started. The website shows cruises restarting in April 2021, which is looking feasible, given how fast the latest talk of vaccinations is, if AstraZeneca/Oxford vaccine is approved in about 10 days, then mass vaccinations in stadiums, etc, all over the country. Saga's target demographic should be largely done by end March, so the papers are saying. Then huge pent-up demand for cruises - recent Telegraph article indicated that bookings are flooding in, at an unprecedented rate at the moment.

Hopefully when the trading update due on 26 January is issued, then investors might start focusing on the (lucrative) resumption of the 2 new cruise ships. Plus the other travel businesses. And of course the insurance division was trading OK anyway, per recent interims.

Very detailed recent interim results presentation is here. I'm just going through it again to refresh my memory. After the recent fundraise, SAGA is NOT financially distressed at all. The Bond is fine, and the cruise ship loans have covenant waiver until June 2021, and the lender is highly co-operative. So just not an issue. Placing paid off most of the bank debt.

Logical David

The question I would ask is...

Why do we get so many virus outbreaks which start in China?

I'm thinking of H1N1, H5N1, Avian Flu, Swine Flu, SARS, Corona virus, etc.

What is China doing wrong?

Richard Goodwin

That's an interesting view. Thanks. I may be wrong but I think that the issue isn't whether hospitality is worse than supermarkets. It is that the government has decided that we can't have both and supermarkets are necessary, restaurants are generally luxury.

Hi kgb1953,

Regarding the statement... Someone once said you should never 'love a share',

I made a similar comment to this about a month ago, when I stated that you... "shouldn't get emotionally attached to a share and to remember that shares are for buying and selling, not for collecting".

It looks like the performance of your portfolio is similar to mine given what has happened during this year. I was down by around 35-40% following the crash but my portfolio has since bounced back and it is currently up +26% compared to the start of 2020. When you factor in that the UK stock market is currently down by around -14% for 2020 then this means I have beaten the stock market by 40% so far this year, which I'm satisfied with. I'm sure there will be some full time PIs who will have beaten this figure but so long as I beat the stock market then I can sleep at night.

Clearly, this achievement wouldn't have been possible without the help of all the information and metrics provided by Stockopedia and the team, including Paul & Jack. I renewed my membership to Stocko a few weeks ago because I believe it represents excellent value for money. I would like to say a big "Thank You" to Ed and his team, including Paul & Jack for all the work which has gone into making Stockopedia the great success it is.

Hi simoan, could it possibly have something to do with the fact that maybe none of the politicians have a degree in politics??

Whitbourne

Hi David,

"What is China doing wrong?"

I think we know the answer: "Allowing the sale of live animals for food in open markets where pathogens can readily readily be transmitted from one species to another, including from animals to humans."

China is a society where it is still relatively common for people to come into contact with a live animal that they are about to eat - whether it's a duck, chicken or something exotic like a pangolin. That was once normal in our culture too, but no longer.

mojomogoz

Congrats on the bounce back LogicalDavid. Nerve wracking for everyone 2020.

I think your experience is quite typical for PIs based on comments here and I've seen on Twitter. My overall experience is very similar although when I'm up or down is perhaps different as my portfolio is probably quite different from typical SCVR investor -> FYI approx 25% goldminers, 30% financials, 15% energy (10% of which is uranium miners and the other non uranium 5% likely to be added to) as significant bunches and then the rest a mix (no simple style just stocks I think misperceived and mispriced). I had an exposure to all these areas pre covid but heavier gold miners and lighter energy and financials (much so for the latter!). I'm neither a gold bug or an enthusiastic commodity investor and its really what I'd call the capital cycle that has taken me there. TBH I'm not a natural enthusiast for financials either.

So its interesting a lot us are having quite similar outcomes (commiserations if you're not...and beyond owning large caps interesting to know why those people think the year went bad for them...what in their bias went against them?).

In a bad year it seems people are commonly up 15-45%. This makes me nervous. It makes me even more nervous that I am sharing a return pattern with people (SCVR, UK stock twitter) that are very different in approach to me.

So I conclude that 2020 is in no way the tell or difficult year...it seems we will be shaken out in 2021. TBC I'm not being all bearish and negative. I just think there will be narrative shock through 2021. Buckle up!

20th Dec '20

Sounds like you are more holding out for massive inflation and some sort of financial collapse but you are also holding financial.

Good for risk to play a barbell strategy, I did that from April with 'covid' and non-covid' stocks.

All of the major banks are telling private clients to go bull UK value but the performance of that largely depends on a Brexit deal. The housebuilde will probably do well either way.

A good balance of solid companies growing strongly and stable companies with little external threat is a good approach right now as it does seem uncertainty is creeping in again but with covid on a fight back, investors keep coming back to the online retailers and game developers, both as customers and as shareholders. £AO Boohoo (LON:BOO) £AMZN £EA Just Eat Takeaway.com Nv (LON:JET)

Bonitabeach

my view remains that the government should never have locked down. They should have followed, as they originally intended before Ferguson's disastrous modelling paniced them, the Swedish model.

Failure of the Swedish Model - May 2020

If it goes wrong it is up to me to take the consequences.

But in reality it is easier to blame the government, Professor Neil Ferguson, or perhaps anybody else who stuck their head above the parapet?

You have my sympathy for your lost business, but too many have lost more than mere money in this crisis with no living precedent. So many have been selfless in their actions, too many have been incredibly selfish; we all share the consequences.

No, not holding out for inflation nor financial collapse. Nor buying hindsight as you seem to be recommend. I hold good 'quality' companies with a future that is under appreciated...IMO

Have growth and surprise plus, I believe, where the capital cycle is in my favour. No stocks are about covid and non covid. IMO it is an intellectual conceit to believe one can picture the capital market path through covid through covid v non covid stocks. I’m not smart enough to dance through minefields. Covid v non covid has occurred...move on rather than anchor to the past and overpay for hackneyed narratives.

I am experienced and knowledgeable re other market cycles and regimes. I do not live in a bubble of now nor assume I have overwhelming knowledge of how things will play out. I don't anchor to the past (ie I do not play hindsight billionaire) and select stocks through a rearview mirror as you seem to be recommending.

I'm often wrong.

I agree Withbourne. Also humans are globally destroying the habitat of various wild animals at incredible speed. This means humans are regularly coming into contact with wild animals which it wouldn't normally do. This in turn also speeds up the transfer of pathogens to humans. I seem to remember that scientist's estimate there are around 40-50 viruses in the wild which humans have not yet encountered but as we encroach on the habitat of wild animals, we will. This is a recipe for more virus outbreaks in the future.

Watchdog

I would agree entirely Si. For an amusing take on the subject of incompetence, this short video from a TED Talk should be compulsory viewing for all managers, as well as those who aspire to high office:
https://www.youtube.com/watch?v=zeAEFEXvcBg

Rusty2

In China they eat anything, some species we don't eat in western countries , so these viruses are more likely to spread to humans in countries such as China.

I did watch a video of the market in Wuhan, not pleasant viewing.

Their practices are different from the west.

They should have followed, as they originally intended before Ferguson's disastrous modelling paniced them, the Swedish model.

The argument that the Imperial model was flawed or "disastrous" appears to have gained unquestioning acceptance in these parts.

Unsurprisingly the CV-19 modelling work has continued in the months since, including large scale reviews which broadly agree that Ferguson's team's models were correct given the limited knowledge available back in March. The ongoing results have continued to closely track actual death rates given the various measures taken.

The BMJ report confirming this is here: https://www.bmj.com/content/37...

As for the "Swedish model" I think the best we can say is that they actually had a strategy.

Momoko Miyamoto

Home to a 5th of global population mostly living in industrialised interconnected urban centres. So simple odds would make it the most likely place for an outbreak to take hold.
But, modified coronaviruses have previously escaped from the level 4 bio-pathogen lab in Wuhan before. The animal market story may just be a plausible cover to spare embarrassment.

Small Cap Value Report (Fri 18 Dec 2020) - TCM, UCG, MUL, RTN, SAGA

Furlough Scheme

Telit Communications (LON:TCM)

United Carpets (LON:UCG)

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Paul Scott

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