Small Cap Value Report (Fri 21 Jan 2022) - PHTM, ECEL, OTMP, WRKS

21st Jan '22 by Paul Scott

123 comments 10479 reads

Good morning, it's Paul & Jack here with the last SCVR for this week. We've been so busy with numerous company updates, that the whole week has gone by in a blur, I can't believe it's Friday already. If it's quiet for news today, then we have plenty left over from earlier this week to circle back to.

Weekly audio (and written) summary

Jack & I have recorded another weekly summary on audio, click on link above.

Please bear with us, as we tweak the format, and trial various ideas. Over time we'll improve audio quality, and where we publish it. At the moment I'm just publishing the audio on my personal shares website, for convenience. There's now a donate button for ZANE on there, if you're feeling generous.

Agenda -

Paul's Section:

Photo-me International (LON:PHTM) - a controversial takeover bid at 75p cash, from the CEO (largest shareholder). Where's the bid premium? This looks a poor deal for small shareholders, who have endured the losses & uncertainty from the pandemic, only to see the post pandemic upside now being taken away from them by the CEO.

Onthemarket (LON:OTMP) (I hold) - when is a profit beat not a profit beat? When they decide to start capitalising development spending! Overall, this update reassures rather than scintillates.

Works Co Uk (LON:WRKS) - a very good update. This looks good, with strong trading, and divis likely to resume. Digging a bit deeper though, the cash pile is needed to pay heavy trade creditors, so not surplus cash. In the absence of broker forecasts, I crunch my own numbers, concluding it's pretty good value, but not as cheap as it looked at first glance on that eye-catching £15m EBITDA guidance.

Jack's Section:

Eurocell (LON:ECEL) - strong sales momentum and FY profit before tax to be slightly ahead of the consensus figure of £26.5m. Ongoing cost inflation is being mitigated by price increases and surcharges. There are also a couple of growth projects that should help the group in the medium term. It’s not the kind of stock that has ever traded at a premium valuation though, so I wonder about the upside from here.

Preamble from Paul

People seem to like my general market/macro ramblings, so I'm getting up very early to…

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Trident

21st Jan '22

To me shorting Tesla is like a Test Your Strength! fairground attraction. Its more about proving something to yourself e.g. I am fit and strong; the world is rational etc . But the point is, its the fairground owner who always take the money, whatever happens.

Yours faithfully

Trident (A 7 stone weakling!)

rmillaree

. How long will the batteries last? Cost to replace could right some of them off.

With regard to Tesla the tests they have run on battery performance have been remarkably acceptable all things considered. I think some other companies have much larger issues with degradation compared to Tesla.

https://electrek.co/2020/06/06...

Real-world data showed that Tesla battery degradation was less than 10% after over 160,000 miles (257,500 km):

More recent stats available that are beter but these come from Tesla

According to the company's data, the average vehicle battery in Tesla should still have about 90% of its original capacity after 200,000 miles (322,000 km) of usage.

https://insideevs.com/news/525...

Certainly those numbers seem reasonably decent to me if you are lucky enough to be in the average bracket.

. The problem is depreciation on EVs,

https://www.buyacar.co.uk/cars...

I think each survey will show different results so my chosen search may not statistically prove anything but looking at lists of slowest depreciating vehicles electric cars seem reasonably well represented. On the above selected recent link Tesla model s came in as the best ie depreciated slower than everything else.

"The rise of Tesla has been meteoric to say the least, and the all-electric manufacturer’s Model S holds on to its value at a similarly impressive rate."

Aysgarth

I don't like the idea of a short in Tesla..what with them being electric!

chris2021

Another week of great updates. Tell me, how are you shorting Tesla as I’ve watched its rise and rise beyond excessive, through exceptional to unbelievable.

Dennis Ayling

Agree, the majors are not standing still. The Mercedes Vision EQS looks better than anything Tesla have to offer. OK still not in production & expected to be £100k + so perhaps not a vaild comparison.

Tesla certainly have had first mover advantage for a while but the others are catching up fast.

Boon

I fully expect to see lots of indiscriminate movements across many shares, when so much of the market is "owned" by passive funds like ETFs.

Brilliant for individual stockpickers. DYOR and have a list of what you think are good quality shares, and their bargain prices. And just wait. For the indiscriminate selling to force those prices to levels where it is a no-brainer to buy.

Of course... depends if you have the skill to pick quality companies. Nd calculate the no-brainer pricing...

Rusty2

I was talking more generally than Tesla batteries. I don’t think use is the issue , it is more to do with time, judging by my lithium batteries, they are ok for 5 years but then go down hill quite rapidly after that, so it’s a concern if buying a used EV which is around 5 years old. I won’t be buying one for another 5 years because the range of older ones is just too low. If I can buy a 5 year old Golf type for £10k, I may do that, with range of 200 plus miles. If the batteries only last around 8 years then that could be a real issue, unless battery costs come down considerably.
Depreciation depends on the starting value, my car depreciates around £1k per year, but a £70k one, is likely to depreciate much more in £s, even more if the batteries only last 10 years.

simoan

I have no idea where we go from here but I don't think the tech / data / space narrative medium term story has remotely gone away. It was definitely frothy, so a 10-20% correction always seemed likely at some point on the tech indices and we are around the middle of that now.

Well, you’ll never get on Bloomberg TV admitting you don’t know with great certainty what happens next :-)

I agree that a pullback was necessary in Technology et al. and not unexpected at some point. As such, it seems a healthy thing to happen. Next week will be important in the US with Microsoft and Apple reporting. Meta, Amazon and PayPal the week after.

All the best, Si

Robert W

22nd Jan '22

The nearby one in Southfields is reliably full and good. Branch specific problem?

Wilbraham

Quite a long torygaff article the other day on battery life (paywall removed) https://12ft.io/proxy?ref=&...

Typical estimate seems to be forecast 2.3% pa loss of capacity, leaving say 80% after 10 years or 70% after 15. But obviously limited real world data so far and in practice may look more S-shaped. Also affected by host of environmental/useage factors. Note that they all now incorporate lots of clever tweaks, eg inhibit too frequent fast charging as that shortens life. As others have said, look at lease rates to get a feel for likely residuals.

I do feel the industry missed a trick in not going down the path of swappable battery packs. As far as I know, only Nio has championed this. Crazy world where EU wets its pants over the trivial issue of iphone charging cables yet ignores major initiatives like this which, if properly thought through, could have substantially reduced the need for expensive fast charging stations cropping up everywhere.

Thanks that's somewhat reassuring. Doubt I will be around in 15 years time anyway. By then it's predicted, by some, that we won't own cars and the will be driverless. I think it will take longer than 15 years, many things do. Some were predicting, most people would be buying EVs in the USA, by 2021, that never happened.

Yes I thinking changing batteries is an issue and the cost of them. Shortage of lithium could be an issue and there are enviromental concerns about lithium, switching away from lithium maybe a good thing. Other issues is where is all the electric going to come from if people do switch from petrol/diesel to EV and also switch heating from gas to electric. At the moment we are using around 40% gas to make electric, we are even still using coal when it's not windy. Recyclable only produce around 25% of our electric production, we are also importing around 10% from various countries. Problem is if its cloudy and not windy then recyclables produce next to nothing, some days it's down to around 7%. Solar in winter is very low in the UK, often around 1% on average. The only answer seems to be nuclear but that takes many years to build, around 10 and is unpopular with some people. Here is the live UK electric production: https://grid.iamkate.com/

"If the batteries only last around 8 years then that could be a real issue, unless battery costs come down considerably."

I think you are right to be skeptical about picking up any second hand ev - i would guess there will me massive variability for some time to come (and then some if some makes fall off a cliff unexpectedtly after that ) . I remember watching an telly program a while back and they were specialists at adding range to ev's - so perhaps over time more garage type businesses may morph into doing a tart up of vehicles by removing or adding to the battery packs , thats unlikley to ever come particulalry cheap. so i guess value wil be what someone is willing to pay i guess a car that only does 50 miles might still have some use to some if they know they are paying bottom dollar rather than top dollar. Could easily see it being a trend if battery tech moves on well that keeping the shell of your old car and simply replacing batteries and other bits and you might be good to go for another 10 years.

kenobi

yes indeed, and the problem is when people start accepting big rises in the costs of things and demanding higher wages, and then spiral gets going and is really tough to stop, then we have to try incomes policies etc. The truth of it is, we had huge inflation which was only controlled by Mrs Thatcher, by a massive recession and very high unemployment, people don't strike for higher wages when they fear for their jobs. Then after that we signed up for the free movement of labour within the eu. Now that obviously meant you didn't have to pay more you just paide people from poorer countries in Europe. Now all that's gone, along with a surge in demand for physical items rather than holidays. Now that will reverse, possibly as soon as this summer, and that might swing too far the other way, as people who haven't been abroad for a couple of years, rush there. (exporting inflation to those places and causing more here as holiday prices go up through supply and demand)

If we learnt anything from the 70s and 80s it's that once inflation gets intrenched it's really hard to shift. And it eats away at peoples savings, while they can earn nothing in interest in the bank to offset it (that was the root of the destrest mortgage crisis), here the governments have screwed things up by having such low interest rates, and compounded it by being late to move them up, and on top of that having the help to by scheme extended (help to ramp up prices more like) followed by a stamp duty holiday.

So now we have lots of people with huge mortgages who can only afford them because rates are low, we have huge national debt, we have a government who through help to buy owns 10% or 5% of a lot of properties, so they're exposed to house prices too. So the thing to do (like the irishman said when asked for directions " I wouldn't start from here" ) is to start raising rates earlier, unfortunately now, so man people are trapped by the expectations of low rates, rates haven't risen since before the financial crisis, (apart from the recent tiny one). pushing up rates to take the heat out of inflation would be very painful indeed, it would hurt not just consumers but the government too. plus letting it rip, well think of the advantages, that debt we've built up, gets inflated away. I really hope I'm wrong, I really hope that inflation drops back in the summer, when demand changes and that some prices will fall again, why wouldn't raw materials fall ? surely energy costs will fall back ? solar and wind must be very profitable at these elevated levels, why wouldn't more be built to satisfy demand and stop using gas to generate electricity ? why would wood prices stay high if demand falls ? etc etc,

not many remember what it was like, really hope we don't end up there again,

Cheers K

I think this level of uncertainty is giving investors plenty of reason to take money off the table right now.

yes, the problem is what do you do with it, it's depreciating quiet rapidly as cash, how to get a return, on something that isn't likely to fall in value, that's the challenge !

eParo

CEO of Photo-me International (LON:PHTM) had to make mandatory offer as his holding went over 30%. So why is Sagi at Kape Technologies (LON:KAPE) allowed to hold 54%?

Westway001

I find it quite difficult to press the sell button to liquidate at, say, an average of 10% down on portfolio with no prospect of putting it anywhere which will make money. I recently invested in Liontrust (tipped by several as their share of the year) which has promptly dropped 15%! If I wait 2 years it might come back, otherwise I just crystallise that’s loss now.

JohnEustace

23rd Jan '22

My neighbour just bought a diesel Kia. He enquired about the hybrid and was warned that a replacement battery pack would cost £15k. And as the initial price was £10k higher and it was his own money he chose the diesel.

Richard Goodwin

24th Jan '22

I remember going with my Dad to a talk by Bob Beckman about the Downwave in the early 1983 perhaps? I can only have been about 12. I learned never to believe anyone who thinks they know how the world will be.

Lincoln Green

I remember as well, when I was young, seeing this guy Bob Beckman on a television programme claiming a lot of things would go bust including a lot of banks. I remember thinking that he was either very clever, telling it as it is, or a conman or a bit of both. It was a moment that stayed in my mind. Banks going bust seemed unthinkable at the time, the odd one yes. He must have been clever, if true, to have made a million by the age of 26, which is what he claimed. Although losing it by the age of 27. His next million taking 13 years with a more careful approach.

Although not looking for it, years later by chance, I found his book 'The Downwave' (published 1985) in a charity shop. It is based on the 'Kondratieff Wave'. Later I found his book 'Into The Upwave' (published 1988). In 2012 a journalist wrote, 'Into The Upwave was published in 1988, but some of it is so relevant now that they might as well save money on economists and read the first few chapters out loud on the Ten O'clock News every night.'

Caper4

25th Jan '22

That looks truly awful food to me and why not have healthy sparkling water rather than Diet Coke ? You really need to see a nutritionist Paul. We don’t want you popping off before your time :)

Small Cap Value Report (Fri 21 Jan 2022) - PHTM, ECEL, OTMP, WRKS

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Paul Scott

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