Small Cap Value Report (Fri 18 Oct 2024) - WTB. Others All Short Comments: FUTR, BOO, SHI, EVOK, KOO, SALT, MTC.

18th Oct '24 by Paul Scott

91 comments 9705 reads

Good morning from Paul!

All done for today, and the week! Have a smashing weekend :-)

Macro/Markets News

Sorry I forgot to write this on Friday, only just remembered on Saturday.

These are a few points I jotted down this week.

Continued uncertainty & speculation about what tax increases are coming. The latest thing is leaks, and hints to the press, and Govt ministers “refusing to rule out xyz” - eg
The Guardian says Govt is planning a £3bn tax raid on the gambling sector. It’s difficult to argue against this, given the huge damage they do to many peoples’ lives. Apparently some other countries have much higher gambling taxes. This strikes me as a high likelihood for a tax-hungry Govt to target, and probably get little pushback, hence why I am avoiding this sector at the moment. Gaming Realms (LON:GMR) does look a potential bargain though, having sold off in sympathy this week.
Starmer said in an interview that claims Capital Gains Tax would rise to 39% are “wide of the mark” - suggesting there might be some increase in CGT, but not the worst case scenario? We’ll find out on 30 October, but I’m trying to work out what’s most likely. I think an increase in Employers NICs is looking highly likely - which is why I’m steering clear of any big exposure to hospitality or retail sectors right now.
Some increase in Inheritance Tax or closing of loopholes/exemptions seems likely. Let’s hope AIM isn’t clobbered with losing its IHT tax breaks.
Scuttlebutt from conversations I had this week with several estate agents in Bournemouth, who said both buyers and sellers are hesitant, with many people waiting to see what’s in the Budget before committing either way.
Inflation - good news from ONS with a sharp decrease in CPI down to 1.7% in Sept, due to a high prior year comparative dropping out. Good readers comments on this in Weds SCVR. High likelihood of further interest rate cuts in the UK. ECB cut interest rates again this week, to 3.25, now much higher than the UK’s unnecessarily high 5.0%.
ONS data on wage growth showed it slowing to 4.9% or 3.8% including bonuses. This is now well above inflation, so working households are now enjoying rising real incomes, which should translate into more…

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Alkmund

18th Oct '24

Reading today's report at the end of the day, so sorry commenting on Whitbread (LON:WTB), which I don't hold (but use) quite late. Regarding Premier Inn Pod rooms, I have stayed at several over recent years in (at least) London and Edinburgh when on work trips and they worked very well - comfortable, clean, quiet and well laid out. That said I only needed them to sleep in, arrived late and got up early and so did not need to spend any time in them during the day. If I was staying for pleasure or spending any time working in them, I would find them claustrophobic but often there may be communal areas to sit in with a drink. I don't remember any specific check in issues, but I'm sure if the IT system was down there would definitely be a big problem. What probably matters most is that there are humans on hand to go back to manual systems if needed. Not too long ago the IT system at immigration when entering the US went down, and fortunately we went back to people, paper and pens, which was definitely very much better than spending the night sleeping in the airport.

davidjhill

The longer the saga at Equals (LON:EQLS) goes on the less likely anyone is to accept it if the business continues growing at 30%

I am not minded to accept at 135p personally.

Wimbledonsprinter

I have some concerns about how Gore Street Energy Storage Fund (LON:GSF) presents its numbers (operational EBITDA and fund level EBITDA - and it worries me why a company would pay large dividends for 5 years out of capital raised from investors, rather than covered by actual free cash flow. I also question the whole battery energy storage system (BESS) listed sector, which seems to have presented itself as solid dividend paying infrastructure investment, when its cash flows have been so volatile (as battery revenues have been so volatile) in recent years - particularly in the UK.

Having said that, I too view today's statement as positive as it should contribute to the coverage of the dividend and create more stability going forward.

My main concern going forward is the continuing decline in BESS pricing for new batteries. This is partly due to weak lithium pricing but I also understand that economies of scale are also bringing in greater efficiencies in production. Hence operators with existing BESS capacity (e.g. Harmony Energy Income Trust (LON:HEIT) , Gresham House Energy Storage Fund (LON:GRID) and Gore Street Energy Storage Fund (LON:GSF) ) might find that their historic price of their installed base is not competitive. New lower cost entrants might push down the equilibrium revenues BESS will earn.

I have owned at various times GSF and GRID - but I have no position now.

Yes I’d say a 20* PER is exactly what you’d expect for a business with a strong moat, zero customer churn and very very sticky revenues.

Barbara

My husband has plagiarised Phil Hanson’s spreadsheet and updated it to include stock rank. He only started in August this year but it will be kept upto date. Should anyone want to view it the link is here……

https://docs.google.com/spread...

JCPr

Hi Paul, re your comment on the Whitbread (LON:WTB) share count decreasing, that was when they had a tender offer after selling Costa Coffee. The share count did actually rise after they had a rights issue during the lockdowns. (I hold).

Spender71

19th Oct '24

Thanks Barbara. Tell Hubby, Thanks.

Thanks Ken. Perhaps the cash could be utilised as a special dividend rather than buyback as a more tangible benefit to shareholders. Also , unless the shares are cancelled is there a risk they sit in treasurey possibly awaiting awards to directors.

rmillaree

Whitbread (LON:WTB)

Re Whitbread (LON:WTB) buybacks. Perhaps worth pointing out that Whitbread sold Costa for £3.9 billion in 2018 and decided to return most of that cash to shareholders via a big buyback. Those buybacks started around £40 and the share price has never since reached that £40! Was it really a “reward to shareholders?”

This keeps getting repeated (not sure if its always the same poster or not ) - but are you really saying a one in a hundered year event like covid should have been seen or planned for? - clearly the reasons the buybacks look poor value NOW is 100% due to the later effects of covid on the buisness after that buyback was done. They will have been far from alone in being caught out by covid and this is a really poor example to try and argue/show buyback are always bad - they aint and thats pretty simple and in this cirsumstance their timing ref buybacks was very unlucky - its that simple.

Paul Scott

Thanks Barbara, your spreadsheet looks interesting. So is it trying to measure performance both of my/Graham's colour-coding, and the StockRanks combined?

There seem to be some prices manually overwritten, which means those are not updating to give the latest prices. I tend not to overwrite any of the live current share prices for this reason, or only if the company has delisted, to give the last price when it delisted. Whereas you've overwritten some live prices for shares that are still trading normally, so it's giving incorrect results on those overwritten prices. It's fine to overwrite the original price on the day of the report, if that fails to update, but the current live prices need to be a live formula, not overwritten, because otherwise you'll need to keep manually updating the live prices.

Great to see someone modifying and tweaking Phil's spreadsheet for your own use, and sharing it with us, we hoped that would happen! :-)

Regards, Paul.

Paul2148

I stayed at the hub by Premier Inn on Farringdon Rd (London) a few months back. It ok, served its purpose but was pretty pricey.

This was a single night stay before a meeting the following morning, so just needed somewhere to eat and sleep. Similar to Alkmund, arrived in the evening and the pod room was fine for a single night stay. Bed very comfortable but I do think the touch console by the bed that controls the lights and temperature felt flimsy and I can see this wearing out.

No noise issues at all, in fact the corridor on the way to the room was deathly quiet. The room and hotel were clean but I did find the bathroom lacking, the shower had little water pressure and there is no room to work - I did try to do a bit of work on my laptop in the morning, which was uncomfortable, to be honest.
I would not want to spend any time in the room beyond sleeping.

A few staff on hand who seemed to do everything from checking to working the bar and preparing the food.
On this point, given the time I arrived and the long day I’d had, I decided to eat at the hotel the evening I’d arrived. Very limited menu and pre-prepared microwave food in the evening. Breakfast was much better with both cooked and continental breakfast served.

Staff pleasant enough, but couldn’t pour a pint despite two of them trying - London prices (double what I pay back home) for what turned out to be little more than a half! Would have caused a riot with the Camra card holding brigade in my local. I hasten to add this was in the evening and not with breakfast!

Paul is 100% correct here JCPr - you are getting confused between the earlier stuff and the more recent buybacks. Just to clarify Paul is talking about buybacks that are real and have been going on last couple of years. The recent half yearly results have confired that in the last 24 months the share count has reduced from 200 million to closer to 180 million - so its exactly as Paul has described (the pre covid buyback and during covid issue of shares obviously happened but aint really relevant to the here and now)

ken mitchell

It’s not that simple rmillaree. Whitbread sold Costa in 2018 and the buybacks were completed before covid.

There are so many examples where there was no obvious “reward to shareholders” from buybacks and where after them for many years the share price did not again reach the buyback prices. E.g Abrdn (LON:ABDN) who started buying back at £5 around 6 years ago and where the share price has fallen ever since, despite further big buybacks every year. The share price is now around £1.70 and way below the £5 buyback starting price.

Future (LON:FUTR) have just completed their buyback programme and at an average £9.72 price. That’s not a reward to shareholders now the share is under £8. And it would have been better buying back when the shares were much lower around £6 at the time of an upbeat trading update then.

Buybacks can work well. E,g Next (LON:NXT) is a classic example where they have been very effective. Next will only buyback when confident the share is at a bargain price. But for every NEXT there are far far too many Companies that just buyback at sometimes highly rated share prices and don’t only buyback when the share looks good value at around £6 this April instead of AFTER the share price had risen substantially.

The big Mining Companies like Rio Tinto (LON:RIO) spent multiple £billions buying back their shares prior to the big Mining Sector bear market that ended in 2015 which saw their share prices crash, rendering those buybacks ineffective. So now they don’t buyback and reward shareholders via dividends and big specials in the good years. They paid dividends of 20% that way in 2022.

The ones that have been manually overwritten (coloured in blue) all have a comment on them explaining the reason. If you have reported on the same company more than once then the current price is locked at the price it was when you gave a new rating. Graham added that in after listening to your podcast where you always state your ranking is on the data of the day and your views change when you revisit so thought it was right to lock the price when this happens. If you sort the data on company name then view the blues it will all make sense.

Rusty2

20th Oct '24

But you don't know what the shareprice would have been if they had not done any buybacks? Future (LON:FUTR) could have much lower.

US large caps do large sharebacks and their shares go up and up. Some shares are not going to be saved by buybacks such as Abrdn (LON:ABDN).

I find them very good value, stayed at one near Heathrow, only £42, room was excellent, had be refurbished recently. No noise from outside. Food was quite good. No issues checking in or out.

One in Liverpool was only £38, did not stay as not in the right area for me.

sorry ref early buybacks bit was that simple at Whibread - the buybacks turned out to be wasted money only because covid came along later and that severely impacted the business - its that simple. this is a well run business (as they are kinda proving now) and buybacks would probably have been good value without covid.

they couldnt have seen covid so buyback were particualrly poorly timed - obviously we know now that was bad plan but thats ONLY with the benefit of hindsight because covid came along.

Its always about the future success of the business that matters ref buybacks - if busines does well then buybacks genrally work. You can pick any number of companies where things went bad later and its obvious that things wont work out well ref buybacks.

There are so many examples where there was no obvious “reward to shareholders” from buybacks

If one doesnt believe in future success of the company you own surely you would simply sell up ? so sometimes buybacks can be a good time to exit the investment if you believe that future prospects arent great and that them betting on themesleves doing well is hubris.

Boon

21st Oct '24

I'm also tracking Iofina (LON:IOF) as a potential play.

However, how do you get comfortable with the fact that brine supply is dominated by a few suppliers, and that the company kinda has no security/control over the supply?

Ideally, this needs to be bought out by one of the oil/shale majors who also own the brine, and therefore use Iofina as a nice profit-maker on the side to lower their net cost of oil/gas production.

DavidMcCabe

22nd Oct '24

I was in Iofina (LON:IOF) , attracted by good ROC and expanding production. However, I sold at a loss when one of the brine suppliers pushed through an increase in price mid way through production. As boon suggests, any increase in profits might just taken by the brine supplier.

Parsley

23rd Oct '24

Love the spreadsheet. Thank you. I to have plagiarised but added a FTSE250 column (index at time of review) so I can track the broader movement over the same timeline and compare with each individual share.

Small Cap Value Report (Fri 18 Oct 2024) - WTB. Others all short comments: FUTR, BOO, SHI, EVOK, KOO, SALT, MTC.

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Paul Scott

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