Small Cap Value Report (Fri 21 Sep 2018) - CARD, MOSB, TAST

21st Sep '18 by Paul Scott

27 comments 11396 reads

Hello everyone, it's Paul here.

This is the delayed report from Friday 21 Sept 2018 - apologies for the tardiness.

If you want to read my comments on FCCN results, the only way to do it seems to be to provide a link to comment no.28 in yesterday's report, which is here.

Retailing sector

In this catch-up report, I'll be covering results from 3 retail chains.

Last week, I was asked to give a presentation at a private investment seminar, about the retail sector. A summary of my main points follows below, which may be of interest to the wider audience here;

Conditions are terrible - with sales leaking away to online competitors, and costs rising (mainly related to weak sterling, and staffing costs)
Many retailers are likely to go bust - but survivors could prosper (last man standing basis). Current over-capacity likely to take years to unwind
Consumer confidence is better than people think - Aug 2018 confidence index was negative at -7, but this is due to a -26 score for the perceived general economic picture. Personal financial situation is actually positive, at +8
Rents will have to come down drastically, so landlords facing a world of pain, and from CVAs/pre-pack administrations
High Streets need to be rejuvenated with new, independent retailers (e.g. the popular Brighton "Lanes" district) - not the same old chain stores, which make towns indistinguishable from each other
The best retailers, with the right products, should still do well
Strong online offering is essential for larger retailers. 10% of sales online is not enough. Needs to be nearer 50% ideally (e.g. Next)
Supermarket shares have done well in last year, but look fully/over-valued now
With uncertainty over the UK's Government, and Brexit this might be a good time to avoid retailer shares altogether, instead making a watchlist for things to buy at a discount, on any political shock?
Selectively there are big, and sustainable dividend yields available (more below)

My comments on individual retailing shares

(my view as at 19 Sept 2018)

£NXT - my top pick - half business already online, very high net profit margin, actively managing down retail stores, rent reductions, highly cash generative & paying big divis (and buybacks). Valuation reasonable on PER of 12.

Marks and Spencer (LON:MKS) - recovery underway. Closing 100+ loss-making stores, should boost profits (and closures are triggering a…

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Trident

21st Sep '18

Two snowmen in a field. One of them turns to the other. 'Can you smell carrots?'

andrea34

There's an AGM statement from Mercia Technologies (LON:MERC) although there's nothing in the way of figures, the only positive thing it says is "commercial milestones have been achieved in a number of companies".

As prompted by Matylda, a Friday joke:

A man walks into bar and says "Ouch, that hurt!!!"

I'd be interested in any comments Paul or anyone has on the recent announcement from SDX Energy Inc (LON:SDX) as follows (shares currently suspended, as per AIM rules):

The Board confirms that it is in discussions for the acquisition of a significant package of assets in Egypt from BP (the "Acquisition"). The Acquisition would constitute a reverse take-over under Rule 14 of the AIM Rules for Companies and would be subject to Shareholder approval.

Geographically it seems to make sense, and they are far from being debt-laden like many oil companies.

Camtab

Interested in thoughts on the Science business. Just down the road to me.

In keeping with the spirit of the morning after - dyslexic guy walked into a bra!

DJCP

Not sure if this has been posted before, but just found it this morning. Appears to be short interviews with company directors - e.g. Flowtech Fluidpower (LON:FLO) Mission Marketing (LON:TMMG) Strix (LON:KETL) DP Poland (LON:DPP) being some of the recent ones. Haven't had time to watch yet, so have no idea of quality/benefit.

www.brrmedia.co.uk/broadcasts/

@Matylda : (and assisted by @andrea34l )
Paul & Graham are called to Stockopedia HQ for a meeting. They walk into the building ... You would have thought one of them would have seen it :o)

ezlifeme

My earlier pun was obviously too poor to register as such

"The Market gives Moss Bros (LON:MOSB) a severe dressing down on results (Down 27% @ 35.18)"
(i.e. Not up to MrContrarians usual standard) I leave such acid drops to him in future

CliveBorg

Knock knock, who's there? Grand dad. Sh*t! Stop the funeral!

HornBlower

Paul

I would also like to hear your thoughts on Sosander update this week

gus 1065

Hi andrea34l.

I flagged this announcement about SDX Energy Inc (LON:SDX) on the Serica Energy (LON:SQZ) thread yesterday lunchtime given they also purchased a portfolio of non-core assets from BP last November. In that case, it’s done wonders for the share price so far although not without a few issues (one of the principal assets is a JV with an Iranian partner that is muddled up with Trump’s move to bring sanctions back).

In SDX’s case we wait for news and in the meantime the shares are suspended. I personally think it will be good for shareholders, but how good remains to be seen. SDX Energy Inc (LON:SDX) have been doing well in Egypt with their own activities this year and this potentially compliments them but what assets they pick up, at what cost and how they’re financed (in particular with what shareholder dilution) remains to be seen. It may be it all falls through, although the release mentions re-listing won’t happen until either no deal or a prospectus is issued which suggests things are quite advanced but absent real information it’s all speculative at the moment. As I recall, in Serica Energy (LON:SQZ) situation it was about a week between the leak and the formal announcement of a deal but that may have no bearing here. There’s some chatter over on the Advfn company board about what the deal might be but perhaps wind rather than substance at the mo’.

https://uk.advfn.com/stock-market/london/sdx-energy-SDX/share-chat

Gus.

phoenixnight

Paul

I nearly choked on my mid-morning snack when I saw the price of Xeros Technology (LON:XSG) - up 61% on the announcement of a 10 year deal with a Mexican tannery. No numbers are given for the value of this contract, through the RNS makes mention of other ongoing discussions woth other companies in this sector. Stockopedia rates this as a classic sucker stock, with a rating of 1, so you can't get any lower. Xeros Technology (LON:XSG) describes itself as developing technologies for applications that save water - so, for example, developing a washing machine that uses much less water than conventional machines.

I know that as a rule Paul you tend not to comment on contract wins (unless they are material in size), so I'm not asking for any comment from you on this RNS. The reason I highlight this announcement is that I know that other readers and contributors to this board have made comment on other companies that are in the 'water sector' such as Water Intelligence (LON:WATR) Amiad Water Systems (LON:AFS) and Modern Water (LON:MWG) and it seems that in a world of population growth and climate change, this is a potential growth area that is gaining traction. However, on fundamentals, Xeros Technology (LON:XSG) still looks a long way from profitability (revenue of £3m, stonking loss, market cap £41m), and we have all succumbed to blue sky stories at some stage in our past haven't we?

I don't hold Xeros Technology (LON:XSG) but have a small interest in the other 3 mentioned. Also, whilst I have your attention, for the people asking about Sosandar (LON:SOS), I did a brief write up of the Sosandar (LON:SOS) AGM for Tuesday's SCVR if you're interested.

Regards

Paul

Gromley

Well Xeros Technology (LON:XSG) was a small part of my very diversified short portfolio.

One of my reasons for being so diversified with this was that the individual positions are so small that they should not cause too much angst.

It certainly worked for me here and I felt quite calm in reacting to the news and the price movement. (probably helped by the fact that I opened the short position at £1.40 so was still very healthily in profit).

I decided to close the short this morning.

But will be keeping a close eye on possibly re-opening it if the enthusiasm shows signs of abating.

It strikes me that this is typical "story stock" news all puff and no substance. The only material information we can glean from this is that the customer has "a weekly production of 5,000 hides". How many machines would that require? Not many I would guess.

Of course it may be a foot in the door for other deals with other tanners, but we don't know that.

I have read suggestions (which may or may not be realistic, but certainly seem plausible) that the company may soon need to do another fundraise to avoid running out of cash. If that is the case, it is certainly in the managements interest to get the share price up in the short term, so there may be an incentive to over dramatise news like this.

I'll be watching with interest from the sidelines for the time being.

johnsmith68

edited.. I found it... thanks.

Michael Tee

Good evening Paul and Graham,

Was wondering if you or any of the SCVP community have any comments or opinion on the Versarien share offer which appeared after the close this evening?

Thanks.

runthejoules

23rd Sep '18

Hi Michael. Yep, have made a few posts on advfn.com about under this username. Pb didn't work for me & I couldn't get any!!!.

Hi Michael.

I’ve bought into a few of the previous PrimaryBid offers and am on their mailing list. I received an email on Friday at about 17.15 and posted a link under the latest Versarien (LON:VRS) discussion thread by about five-thirty. Although their offers are typically announced as being open for a couple of days they are usually over subscribed and close early. I think this was the case for Versarien (LON:VRS) which closed within a couple of hours.

Given the offers are usually made at a reasonable discount and with no dealing spread/costs, they’re popular with PI’s although many of the companies using this venue are “red stocks” under the Stocko classification. (Versarien is a “Momentum Trap”). While it’s always tempting to buy something that looks cheap, my suggestion would be to only buy those shares offered which you either already hold or have previously researched as these offers usually require a quick decision and application making thorough greenfield research difficult. If it’s a stock you’re interested in you need to be in a position to make a decision and make full payment ASAP to get your order filled. When I have purchased hares, I’ve found PB to be efficient with their admin with confirmation of orders being made prior to market open on the next trading day and shares have been transferred to my broker account within 3-5 working days.

One caveat, is that although the shares are sold at a discount (in the Versarien (LON:VRS) case 18%) the delay between placing the order and receiving the shares leaves you open to a week or so of market risk and in my experience the share price of issuers using PB has fallen to the offer price within a couple of days so any apparent arbitrage melts away pretty quickly. (You could possibly get round this by using a short spread bet or selling shares you maybe already hold in the issuer).

Gus.

24th Sep '18

Details of the Versarien (LON:VRS) placement results.

https://www.investegate.co.uk/versarien-plc--vrs-/rns/successful-fundraising-of--5-2m-via-primarybid/201809240700116312B/

£5.2m raised against a request for £2.9m by the company so heavily oversubscribed. Offer closed at 19.22 so barely two hours between announcement and the shutters coming down. Interested to see how much of this is buy and hold and how much is short term speculation/arb of the 18% discount.

Gus.

Thanks, nor me.

Thanks Gus. Yes and I do hold. Appreciate your effort and hearing your experience. Think Versarien has potential.

GrahamF

Regarding the “watertec” companies like Xeros Technology (LON:XSG) Modern Water (LON:MWG) Halosource Inc (LON:HAL) and so on, having worked in this sector I would say that it is much more difficult than people may realise. Yes there is a mega trend towards increased water cost and increasing water scarcity.

However, there are numerous problems. While the new products may look good, often there are hidden problems and costs such as they may either be insufficiently robust in the field or the installation and maintenance requirements are too high. Furthermore there is the question of how do you get distributed. Do you try and build your own direct sales force taking great cost and time or do you go via one or more of the established companies who have thousands of potential end user customers for your product that they already sell to but need to make a significant margin on top of your margin to make it worthwhile for them. You cannot simply sell these products over the internet. Often the economics of the business model just don’t add up.

Lastly, understand that the water field is rife with what are sometimes known as “magic gadgets”. These are products that sound plausible (there is sciency sounding literature to support them) but do not follow the principles of main stream science. Regardless as to whether the new product is one of these or not (and I am certainly not saying or implying that’s what any of the ones mentioned are) the incumbents in this field are well used to rebutting the claims of new entrants so progress can be hard.

Wait until you see the revenues and profits starting to flow before considering investing in these companies if you are investing for the long term is my philosophy for these particular situations.

(No position short or long in any of these)

mojomogoz

28th Sep '18

Graham, I met the Summit Water Capital founder John Dickerson a couple of times and talked to him about how he picks stocks in the sector. He founded the business over 30 years ago and at the time it must have been the only dedicated water focused fund. His background was as a Ben Graham disciple. His firm is still going now managed by his son after John's death. It seems to have changed from active hedge fund to lots of ETFs (John constructed an in-house water index for years before any of the ETF guys appeared).

His view was that in water he could find stocks with much more repeatable earnings than was perceived by the market but at much lower valuations. Often this would be through stocks mispriced as cyclical industrial stocks but really had a heavy water industry supply chain element which tended to much lower cyclicality and risk than perceived.

He was phobic innovation, even really good and kosher innovation as he viewed water utilities to be super conservative (in negative way to some extent) as their mandate is not to mess up. So moving to something new has a huge barrier.

I've been interested in water for a long time. It is the world's most essential commodity yet its least well priced and nearly always that means super underpriced. This must change with more demand and continued water stress (Dickerson got into as he lived on the banks of Colorado River in South Cal - super stressed and crazy water rights).

The other overlooked fact about water is the energy intensity of doing anything with it. Energy + water is a story to unfold....

But I've printed sheets on the above water companies out of curiosity and to see if anything of interest if I have time

Small Cap Value Report (Fri 21 Sep 2018) - CARD, MOSB, TAST

Retailing sector

My comments on individual retailing shares

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Paul Scott

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