Small Cap Value Report (Fri 18 Jan 2019) - REC, BOOT, MGR, CCT

18th Jan '19 by Graham Neary

36 comments 10907 reads

Good morning!

The RNS is thin today. I have covered:

Record (LON:REC)
Henry Boot (LON:BOOT)
Miton (LON:MGR)
Character (LON:CCT)

Record (LON:REC)

Share price: 28.65p (-9.5%)
No. of shares: 199 million
Market cap: £57 million

Third Quarter Trading Update

(Please note that I currently own REC shares.)

This is a niche currency manager, founded by Neil Record.

I covered it during my reflections on 2018, describing it as a mistake and explaining that in hindsight I gave too much weight to its strong balance sheet when I invested in it, and did not give enough weight to its competitive positioning and growth prospects.

The difficult competitive environment continues to make life tough for Record. Performance isn't going anywhere at present, with "assets under management equivalent" (AUME) falling by 4% when expressed in Sterling.

$1.1 billion of client withdrawals were made in the quarter (out of a starting pot of $61.8 billion), and there are another $1.7 billion of withdrawals where clients have notified Record in advance. So maybe the withdrawals will amount to 4%-5% of starting funds over the course of H2.

On the other hand, the reduction in AUME that is attributable to stock market and exchange rate movements doesn’t bother me, since it is unavoidable. It's the poor trend in client flows that is more of a worry.

Fee rates are "broadly unchanged" - the company has ongoing pressure on fees from rival currency managers.

On the positive side, the balance sheet probably remains as strong as ever - net assets of £25 million as of September 2018.

And the CEO continues to talk up the possibility of rolling out new products and services. I remain hopeful that they will succeed.

It has been a close decision in terms of whether or not to sell out of this position. Most people would sell, but I tend to hold on to things for as long as I possibly can.

Henry Boot (LON:BOOT)

Share price: 254p (+1.6%)
No. of shares: 133 million
Market cap: £338 million

Trading Update

This property developer has traded in line with expectations.

It…

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Graham Neary

18th Jan '19

Hi Dan, I've done that quickly. Thanks for the rec. G

dscollard

just a side bar comment on Taptica International (LON:TAP) but when I tried researching them in the past I found it hard to get a grip on what their actual technical capability and offering was (apart from their acquisition of DSP capability from Tremor for $50m), Normally tech companies and even martechs will want to show off their propellers (take a look at the d4t4 site for example), Taptica International (LON:TAP) had a lot of generic AI, ML algo type language but no specifics which struck me as odd

I may well have been wrong (although the price collapse suggest otherwise) but that gave me a sense of unease. They could well be kosher (pardon the Israeli pun) or alternatively just overpriced media buyers and click harvesters.
I do hold d4t4 mind and have a good grip of how they work and why they are worth holding

Beginner

Just passed their GNVQ Level 1 (Going Nowhere Very Quickly).

Camtab

Hi Graham, again thank you for your insights they are extremely useful. As you would guess we agree some and we disagree some. On this occasion I am in slight disagreeance (which of course is what makes a market!) on REC. I have held this for a few years now and it continues to pay an excellent dividend. Yes there are questions about the value of a divi cut in these more chastened times. Howev er the management will fight this as much as they can because they are invested in the business as are staff. This is a criteria I really like in shares as I know our interests are aligned. Furthermore the bal sheet gives them time to bring the ship around. I agree the current position isn't great but having been involved in the City and fund management funds come and funds go as long as they don't go in a sustained way, which I don't believe they will here. (That though is uncertainty). So we are at the point of disagreement i would like to think they will bring out new products and I am prepared to back that whereas you want to see the baby before you pay for more nappies. Small difference really...... I hope I have interpreted your position correctly.

JohnEustace

Isn't it likely that Record (LON:REC) are losing out to £AFX ?

I hold Alpha FX (LON:AFX). Better to own the disruptor than the disrupted.

I'm no expert on the sector so happy to be corrected .

MichaelFBS

Thanks Edward John Canham. Really helpful.

Have a good weekend.

Purpleski

Hi Camtab, thanks for the comment. To clarify, let me repeat that I currently own Record (LON:REC) shares, i.e. I already paid for the nappies (to use your analogy)! I am backing them to keep fighting and gain some traction with their new products, and I hope they succeed. G

Hi DMG2305

Schroders PLC and MTD PTE Ltd have substantial stakes though MTD is based in Singapore so god knows who is behind that one.

Purpleski.

shipoffrogs

Record (LON:REC) is off my radar screen now. But the last time I looked it struck me that there were two big factors to consider, one positive and one negative.
The negative was that MIFID required collateralisation of fx forwards. Assuming that Record's client base is predominantly institutions that are collateralising other instruments (eg swaps) - there will probably be big incentive to collateralise under one roof. As Record just does currency I suspect they could see outflows as institutions pull their funds to places where they are collateralising their other instruments. My understanding is that this requirement was not enforced but delayed (but I would be unaware of any developments on this).
The other factor, positive, is that Record lost its carry trade business when global interest rates collapsed making it unviable (The carry trade matches the purchase of a high interest currency against a low interest currency which is sold, think -picking up pennies in front of a steamroller). The carry trade works until it doesn't - but it's the clients not the currency provider who go under the steamroller.
If interest rates start to rise - the carry trade could be back on and you could expect Record to multi-bag - from memory Record's share price was north of 300p when it had a carry trade business.

hawkipa

Hi Graham,

Re Miton (LON:MGR)

I have looked at this a number of times and as a firm believer in scuttlebut, I have some reservations about it which have stopped me in the past.

I have two friends who are former FMs there and one loose contact who is presently employed, so have a small grasp of the culture and individuals. The risk of a dominant figure head seems large for Miton (LON:MGR) and currently key man risk is a factor that makes me hesitate, along with the reliance on a relatively small suite of funds focussed on similar niche area. Other than M&A I don't really see what gets them the growth they need.
Fund management is becoming increasingly cut throat and as operational costs increase fee pressure is weighing at exactly the same time. I don't see their performance as warranting really substantial inflows vs the opposition. So it seems to me that buying Miton (LON:MGR) is an M&A trade.

Whilst you mention City of London Investment (LON:CLIG), where I have been a long term holder I also having growing doubts here as I see the founder move towards the exit and the business model face competitive headwinds that may make their institutional investor base question the logic of paying them as a multi-manager. Their under-performance and fee pressure both seem like issues that won't disappear in a hurry. It will be interesting to see if the u/w to tech results in an out-performance as the numbers shake out. If it doesn't I will reluctantly say goodbye. However, the level of clarity and detail the company presents is worthy of a big tick and keeps me interested.

The final name you mention you mention where I have an interest is Jupiter Fund Management (LON:JUP), seems to be being driven by fears about the large bond fund and redemptions. Whilst I haven't done the numbers I do wonder if there is now a lot of fund manager being thrown in for the money when you see an operating margin which is still running at over 40% whilst the market is fretting about its bond fund redemptions. As a result this is my current favoured one to add to on further weakness.

The irony for me would be if Jupiter bought Miton Group!

Regards

Effortless Cool

What puts me off Record (LON:REC) is that the directors seem to be ludicrously over-remunerated. The three senior executives have averaged over £700k p.a. each total remuneration over the last two years, over 50% of which has been cash or share bonuses.

This is in the context of a £63m market cap business that has delivered consistent mediocrity both in absolute terms and relative to its indices.

Albertos

So you're going for the second child !

Have a good weekend !

Phil

Aislabie

Bonhill (LON:BONH) (I hold) came out with a very nice "ahead of expectations" TU this morning but it does not appear to have followers here. As a "Highly Speculative" "Sucker Stock" on an SR of 5 there is clearly scope to ignore it. But I believe that the transformation that Simon Stillwell (ex founder and CEO of Liberum) is making of what used to be Vitesse Media is worthy of study.
The purchase of Investment News is clearly changing the size and potential of the company and the live events are also doing well. Strong institutional support came on board with the fund raising for the purchase,and with the results expected to move from loss in 2018 to a profit in 2019 it should start to show on the private investor radar soon.

rmillaree

Hello Aislabie
Bonhill (LON:BONH)

Thanks for that - it does look pretty interesting if the current forecasts are to be believed.
Mar 18 loss 1 mill
Mar 19 profit 2.6 mill
March 2020 3.39 mill
Shareprice 90p and 2020 EPS of 9.84 - means next year pe of just over 9 - with a nice trend there.

The less of the stats look goddam awful - but i would expect that looking at the prior history of never making any money. Worth some further research.

Oooh todays trading statement confirms they are ahead of expectations so perhaps the numbers may be slightly uplifted soon?

The 3% increase in shareprice today seems pretty muted.

A look under the hood of the balance sheet is needed - on a very quick look though - it all seems fine with borrowing matched by cash and receivables matched by payables.

The main negative to me is the sector they are based in is one where its hard to work out how sustainable profits are - hey ho.

Gromley

Bonhill (LON:BONH) does look potentially interesting if the step change in performance is real (presumably acquisition related?) so I might have a look if I can make the time.

One thing that immediately puzzles me though is :

The Board expects the Company's results for the 9 months ended 31 December 2018 to be ahead of market expectations

Since when do we have market expectations for 9 month periods?

Presumably what they are trying to tell us is that so far they are ahead of expectations for the 12 month period ending March, with full year performance dependent on the final quarter?

As someone mentioned yesterday I'm getting a bit 'grinchy' (I like that description - thank you!) when it comes to the wording of RNSes.

If an odd form of wording is chosen rather than one that is clearer, it makes me wonder why (again perhaps because I spent so much time 'word-smithing' statements for a very particular MD a little while ago).

I wonder if the 'missing clarity' here is something along the lines of : "we are doing better than we expected so far, but Q4 was always the important one this year and we haven't a scooby how we'll do over the next 3 months"?

Hi Gromley

Bonhill (LON:BONH)

Had a quick look at - Stockdale note on Researchtree - they appear to have changed their Y/E to 31 December - which explains a lot.

Looks interesting.

Phil

Bonhill (LON:BONH)

Strange - Companies House are still expecting accounts for the year ended 31 March 2019. Can't see a change of accounting reference date form.

Stockdale

"Source: Stockdale estimates, company data. *9 months to 31 December 2018 as company has changed YE from 31 March to 31 December."

20th Jan '19

Thanks Phil,

The Bonhill (LON:BONH) statement makes a lot more sense in that context.

It makes it more difficult though to understand what the market expectations are/were for that 9 month period - the broker forecasts on Stocko are clearly still for a 12 month year.

It strikes me that the potential confusion over year on year comparisons could create a possible mis-pricing opportunity for those that really know what is going on.

For myself, however, I think l will park this in the 'too difficult' pile. I look again when the results come out.

Just wanted to say a big thanks for the detailed views on the fund manager space. I have no position in any of them as of tonight but am keen due to the valuations on offer. Jupiter Fund Management (LON:JUP) is probably the most "conventional" of the lot which leaves it most vulnerable to competition from passive funds, would you agree? (this could of course be fully priced in now.) Cheers. G

21st Jan '19

No worries Graham, glad it was of some value. Difficult to say re Jupiter Fund Management (LON:JUP) as I haven't looked at the breakdown of aum. At last check Mutual funds were the biggest by a country mile. So if you forget segregated mandates and Investment Trust, as they will generally be quite sticky money then you are really having to consider their performance in mutual funds. I haven't checked this but I would guess the strategic bond fund at £3.65bn is the biggest of their fund suite. Whilst many would tell you passives are worth considering, I fundamentally disagree in the corporate bond space. It is absolutely not the case that they (at the moment) present a viable alternative. Therefore, I don't think this is a competitive pressure that I would worry about in this case. The more pressing fear is that the manager has made a bad call, most likely on duration or bond asset class. The strat bond fund is mostly in BBB space and that has been his call for some time from memory. It looks like the fund size has fallen by c£200m since Apr 18 or roughly 5%. Unless you assume a 2009 style event I can't really see greater than another 5% fall in AUM barring a manager created disaster. This brings an interesting scuttlebutt point for my own analysis. Of all the current major bond investors, which in my former life were my bread and butter clients, Jupiter is one of the few I didn't have a good handle on (The other being Fidelity), however, his longevity points to him being good at his job. The other point being there is massive upside in this fund if you consider the M&G retail fund is at last look about £22bn. So, its entirely feasible that his AUM grows with good calls from here. That in large part is down to the marketing machine, nevertheless there is upside potential not just downside.
As for the other mutual funds, it seems that there are a lot of them, but I haven't found a ranking by size. I'm sure there are measures of firms number of funds in top quartile etc, so I may well do some digging.
My general feeling about Jupiter Fund Management (LON:JUP) is that it could be a beneficiary of the ongoing consolidation driven by cost pressures as it is still bite sized to global players (I'm thinking Henderson and Friends Life here being swallowed up by Janus and Aviva respectively), but in the meantime it is at no greater risk of passives undermining its business model than a Miton (LON:MGR) for example. If anything it may well have the resources to counter that threat by diversifying its fund structure further. The SP does seem to be discounting a lot of risks right now, unless you presume further equity weakness and more importantly a flight from the bond fund.
It's clear to me I need to dig further, but i do think the SP performance warrants further investigation.
Cheers
Paul

Small Cap Value Report (Fri 18 Jan 2019) - REC, BOOT, MGR, CCT

Record (LON:REC)

Henry Boot (LON:BOOT)

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Graham Neary

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