Small Cap Value Report (Fri 20 Dec 2019) - FLK, UCG, TRD, BKS, GDWN

20th Dec '19 by Graham Neary

35 comments 6720 reads

Good morning,

There's quite a few things to catch up on today. I will probably write through the afternoon.

There are updates from Fletcher King (LON:FLK), United Carpets (LON:UCG) and Triad (LON:TRD) - these are all sub-£10 million market cap, but I plan to cover them briefly.

Also:

Beeks Financial Cloud (LON:BKS) (added this in response to reader comments)
Catalyst Media (LON:CMX)
Focusrite (LON:TUNE)
Warpaint London (W7L)

And from yesterday:

Goodwin (LON:GDWN)

Please bear with me while I work through this!

Cheers

Graham

Fletcher King (LON:FLK)

Share price: 42p (-3.5%)
No. of shares: 9.2 million
Market cap: £4 million

Half-year Report

This tiny property company has occasionally looked like an attractive "value" investment, available to purchase at a discount to tangible book value.

It provides a range of property services, including the management of small property funds, and invests in its own funds.

These H1 results show a fall in revenues to just £1.3 million, giving rise to a small pre-tax profit of £108k.

At least this is better than the pre-tax loss that was suffered in H1 last year.

Performance reflects "the subdued property market associated with uncertainties over Brexit and the UK political situation".

Sales and lettings were "severely impacted", and decisions were put on hold due to political uncertainty.

Commercial property investing reached a 5-year low, and this situation helped to bring about the suspension of M&G's property fund.

As others have already said, I think the clarity that the economy might enjoy in the next few months could trigger quite a lot of pent-up activity - we shall see!

On the bright side, for FLK:

Steady and predictable revenue from asset management clients provides ongoing support for the business along with a regular supply of valuation instructions from lending banks.

Outlook statement concludes by saying that no clear guidance can be given:

Although the political climate is now clearer, it remains hard to predict the final outcome for the rest of the year and our previously stated views on the difficulty in maintaining profitability remain.

My view

This is valued…

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Laughton

20th Dec '19

Maybe the wrong place to post this, if so apologies, but Andrew Bailey confirmed today as new governor of Bank of England. Awful decision as far as I'm concerned, he's done absolutely nothing to help/protect individual investors in his current or previous jobs. The lastest, in a very long list, is current failure to do anything to stop advertising for very riskY and unsafe "mini bonds" to all an sundry.

intuitive6191

Probably not missing much. There have been some recent threads and some good points made by people knowledgeable of the industry.

I’ve followed this for a while. It seems a good product but possibly limited by production capacity and manufacturing requirements.

New plants will take time to prove that this is a volume product – hence slow progress.

Graham Neary

cmpeckham --- I also would like to know if there is a source of long-term competitive advantage at Beeks. It's not an ignorant question, it's a great question! G

Beginner

Fletcher King (LON:FLK) also buy, refurbish, tenant and then sell on office blocks. They currently have one on the blocks. It seems rather profitable, and generally results in a handsome special dividend.

Camtab

Morning guys. A company I follow but haven't invested in is Renewi. They have announced that the Dutch authorities have lifted a ban on thermally treated soil today after a period of testing. Mkt Cap circa £200m so should fall in your remit (although Enterprise value sigificantly higher as can be exected with these capital intensive businesses) and their share price has responded from the doldrums. Lumpy contractual stuff but in an increasingly popular sector recycling waste. Stocko has it as a 63 largely driven by value 90. Bal Sheet not good. On cash accruals screen.

Pritch

Hi, there's an excellent video on PI World where Beeks Financial Cloud (LON:BKS) explained what they do at one of the Mello meetings - https://www.piworld.co.uk/2018... - which I think you may find answers at least some of your questions.

ISAallowance

It's a shame Graham moved on so quickly from Triad (LON:TRD), since I was really looking forward to his comments on this random paragraph that appeared in the commentary:

"In addition to these relationships, we will be announcing partnerships in the Robotic Process Automation arena and the Blockchain sector."

Those words certainly moved me - all the way to my online broker to hit the sell button before even reading further.

My summary - they're expanding headcount whilst business is reducing and making optimistic noises, whilst sitting on a large enough cash pile to maintain the interim divi despite the loss in the half. Could either go very wrong, or if they get it right could be very cheap.

FREng

I can get assets at book value and a small dividend from a bank account - and that offers a zero spread and complete liquidity!

Damian Cannon

I brought this up the other day and cmpeckham has done a good job of explaining an aspect of why this can be a red flag. In my view the key issue is that when a distributor is external then the outstanding receivables amount is shown in the accounts - and you can see whether the debtor level is rising, whether it's being written off and so on. Actions taken in this area can boost sales in the short term but will eventually have to unwind.

However if you buy the distributor before recognising that the distributor has too much of your stock then you can avoid (to some degree) unwinding this excess stock in public. And even then if you do have to write off some of your stock then this will take place in the future a fair while after profits have been inflated.

Note that this is just my take on things - I'm not an accountant!

SundayTrader

On the subject of United Carpets (LON:UCG), I think this whole sector has been hit by the tax increases on private landlords. These people are now pulling out, so they are no longer putting in new cheap carpeting, from the likes of United Carpets (LON:UCG), every time there is a tenant change. I don't see this as changing any time soon. Selling cheap carpeting on installment plans sounds like desperation. I suspect those firms with more business in larger fit-outs, or in more up-market floorings, will do a lot better over the next few years.

LeoInvestorUK

This was certainly an exciting morning for me so close to Christmas with major news from Beeks Financial Cloud (LON:BKS), Triad (LON:TRD) and United Carpets (LON:UCG) .

In my view (and according to my model) the Beeks news really transforms their outlook. I covered the news in my blog at lunchtime, but am now writing another piece trying to explain their business model, specifically to address very reasonable questions that often come up like that asked by cmpeckham above. To this end, if you have any questions feel free to message me on twitter (I am open to message requests) or elsewhere. I'll be posting the article first on Stockopedia on this occasion.

Triad is a company that I know a lot about but am less inclined to discuss publicly - feel free to message me with any questions though (during working hours).

Too true, FREng. The yield at FLK is 4% which is certainly not enough to entice me (edit: as pointed out above, you do occasionally get a nice special...)

STOCKWATCH UK

the issue with the Dutch is totally political. There is nothing wrong with the soil, all tested but the politicians needed a way out! I met the CEO some months ago. Will go for a Euronext quote in 2020 I guess.

Beeks : odd how the CEO sold 2.6m shares at 84p recently. I met the guy at the Mello before last and was impressed with the hedge fund service he provides. The bigger he gets the more attractive a target Beeks becomes. Perhaps Gordon bought a new town to launch on Loch Lomond.

brucepackard

Thanks - if you've got a link to the comment I will have a look. I imagine you could make a fair value adjustment (write down) the inventory of the distributor on acquisition. The tangible assets would be lowered, and the goodwill would be higher. But it would mean that you wouldn't have to write off your own receivables, they would just be captured in the goodwill that you (over)paid for the acquisition?

Anyway - buying a distributor does seem to be a "red flag". Thanks for your comments. And do post a link to the original discussion if you can find it.

Thanks Bruce. Looking back we were talking about Tristel (LON:TSTL) here: https://www.stockopedia.com/co...

_ony

A big thank you to Graham, Paul and contributors to SCVR. I started out as a knee-jerk investor and understandbly lost out, but things have changed for the better since I subscribed to Stocko and started following the reports and other articles here. I am now more patient and do my research before I put my cash down. Not saying that I am successful everytime but the failure rate has gone down considerably.

Stockopedia is a wonderful piece of software, so thank you Ed and team!!

Merry Christmas and a very happy 2020.

pcoates

The Accsys Technologies (LON:AXS) offer for new shares was at EUR 1.05, which is about 89p.

Paul Scott

My fiver's in the post! LOL only joking ;-)

CEO sale at Beeks Financial Cloud (LON:BKS) was small, relative to his holding.

Small Cap Value Report (Fri 20 Dec 2019) - FLK, UCG, TRD, BKS, GDWN

Fletcher King (LON:FLK)

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Graham Neary

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