Small Cap Value Report (Fri 23 July 2021) - SUP, TRT, ULE

Friday 23 July 2021

Firstly, apologies for me getting bogged down in yesterday’s newsflow. I’m trying to split my time between attending online company webinars, and reporting on RNSs, and sometimes it’s not possible to cover everything.

The company online meetings probably add more value, so on balance I'll focus more on that. Here are my notes on a couple of recent ones.

Transense Technologies (LON:TRT)

(I hold)

I attended a briefing on the company online this week, where no new information was disclosed, but I learned more about its tech & potential.

This online meeting and Q&A confirmed my thoughts here on 5 July 2021, when Transense put out an in line with market expectations update. What’s interesting here, is that after almost 20 years of pretty dismal performance, and mostly losses, the company has now de-risked by pivoting to a royalties model with major tyre manufacturer Bridgestone. Most of the staff & overheads moved over to Bridgestone, so it’s now a very lean IP business, that seems to be maybe around breakeven, or small profits. So risk:reward looks greatly improved. I don’t see much downside now, and who knows, there could be upside from its various projects?

Management struck me as very straightforward, and strikingly honest in their answers to my questions.

My opinion - Is it a good investment? No idea! The market cap is about £15m at the moment, and that doesn’t strike me as excessive. It could do well, if royalty incomes rise (there seems to be a decent opportunity there, in large mining trucks, so still a bit niche). Plus a few other projects. The downside seems to be that new tech in the automotive sector seems to take forever to actually start selling. Look at Seeing Machines (LON:SEE) for example. Although TRT is not interested in mass market products.

Overall, I enjoyed talking to management, and can see there’s some speculative upside here, probably with quite limited downside (in a bull market) due to the reduced overheads, and flow of royalties - although note the Bridgestone deal ends in 2030.

I get the feeling they want to extract some shareholder value here in one way or another, so I think it’s worth holding onto my small, speculative personal holding. But don’t feel motivated to buy any more at this stage, let’s see what happens. There’s interesting potential here though, so I wouldn’t write it off.

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Supreme (LON:SUP)

197p - mkt cap £232m

Webinar yesterday

I was trying to interpret the results from DOTD, but had this webinar from SUP running on my other computer, and it immediately grabbed my attention. So apologies that DOTD went by the board.

Here are my notes, as usual not claiming to be comprehensive, just what I jotted down as seeming important.

Sandy Chadha - 57% shareholder, seems quite young, and athletic (mentioned he takes the company’s own sports nutrition products). Talks fast, seems highly articulate & intelligent, entrepreneurial mindset - talked us through the company’s development since 1975, adding new product categories when they see opportunities. Strikes me as smart, and highly backable - exactly what I look for.

Suzanne Smith, CFO - I liked the interaction between the boss, and his CFO - she’s quite assertive and prudent, not dominated by him. They got the balance right, but that's presentational, so could be rehearsed, but struck me as genuine.

Potted history of the company from CEO - all about spotting commercial opportunities, starting with grey market importing of batteries from Germany to UK, after spotting they were much cheaper. Frustrated with low margins being a distributor (although forced them to keep overheads low = good).

Moved on to licensing brands, achieving higher margins than distribution. Good knowhow.

New products - lighting - worked really well. No new overheads - bolted on to existing sales, distribution, accounting teams, etc.

Moved to manufacturing in UK - viable if labour costs less than 10% of revenue.

Vaping products - decided to attack low end of the market. Didn’t work. So gave away the product to Poundland at zero cost initially. Flew off the shelves! Since been a big commercial success. Vaping is highly profitable for retailers. Concern over ethics - “I’m convinced we’re helping people give up smoking, which is more harmful” - dubious! Also we offset that by selling vitamins & sports nutrition.

Vertical integration - competitors generally not doing this - we look at all the costs, and ask can we make that ourselves? Eg reduction in cost of bottles for vaping, they now make them themselves - what a brilliant entrepreneur, Sandy is talking my language big time, I want to back this guy! Hope it's all true, it comes across very, very well. I think this feels genuine.

UK vaping factory - could double production with no capex.

Vitamins - latest area Supreme has entered - we can make product at much lower cost than other people. Why are they so expensive? The ingredients are really cheap. Put it in a machine, come back 4 hours later, and you have loads of pills, put them in containers & sell at high margins.

Covid - not much impact

Figures: FY 03/2021 Adj PBT £16.4m (up 21% in a covid year, impressive, resilient business I would say). Adjustments are reasonable (CFO explained, mainly IPO costs and revaluation of forex hedges)

Net debt slashed to £7.6m (down 64%) - error on slide, slapped legs Suzanne, your slide contained a schoolboy error, saying up 64%. Get someone to review the slides carefully before publishing them. I do not like errors, my old CEO would have shredded me if that had slipped through my net, back in the day. Errors happen, but they should be eradicated by self-review, and then second review. If a slide has an error, it means there is not adequate control & review, in my opinion. So the CFO needs a bit of a kick here, up your game please. Being a CFO is all about being meticulous about everything, and I mean everything.

Adj EPS 12.0p - gives a PER of 16.3 - that seems a fair price to me. I’m happy with this valuation, for an entrepreneurial business that is a proven winner at spotting & developing lucrative new areas of business.

Current trading - McColls won as a new customer (be careful! It has a very weak balance sheet, so I wouldn’t supply them without insurance cover personally), and J Sainsbury (LON:SBRY) (I hold) where no such concerns exist.

Balance sheet - is fine. No issues I can see, capex modest.

Q&A - could sports nutrition (new products) be as big as vaping (lucrative products) - CEO says yes, CFO says I’m more cautious, let’s see what happens.

Freight - costs are rising, but have a really good deal for the next year. More bothered by delays, rather than costs, so OK.

Forecasts - too early in the year to revisit them, uncertainties.

My opinion - I probably need to calm down a bit before expressing a view, but have to say that Sandy Chadha is exactly the type of driven, entrepreneurial owner/founder that I like to back - the sort of person who innovates, what can we do about that? Can we make that cheaper ourselves? Why compete at the top end, let’s take the bigger lower end market, offering the same product, but cheaper. This is music to my ears. It’s how entrepreneurs talk & act. The figures look really good, the valuation is probably about right at the moment.

Overall, I think this share looks good, as a long-term, tuck away growth share. In my experience, management with a fertile imagination & great experience, tend to do well.

I can see from the institutional shareholder list, that some smart instis have backed this. Give it 10 years, and I reckon this could be a much bigger business.

Supreme (LON:SUP) should use its more expensive paper to buy Smiths News (LON:SNWS) (I hold) - that would make a great fit. If the deal goes ahead, is a £0.5m finders fee reasonable for me? I would say yes ;-)

Downside risks? - we always have to think about this. As with any new float, there could be something underlying that the owners know about, and we don’t. With Sandy still holding 57%, I’m not worried about that.

Could vaping get banned? Could other companies go after SUP’s margins? Since it’s mainly at the lower priced end of products, that seems a limited risk, but they know the business better than me, so has to be a “don’t know”.

Overall - I think this is one of the best recent floats from my value/GARP perspective. Hope to establish a connection with mgt.

This webinar felt to me, like a masterclass in how to build & grow a business. Sandy should be put on the school & university curriculum, to inspire young people, instead of all the negative nonsense they are brainwashed with at the moment.

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Audioboom (LON:BOOM)

I listened to the webinar yesterday, and got to say it left me cold.

Mainly waffle, it seems to me.

The big problem as I see it, with podcasts, is that they can be downloaded on (personally I use android). The ads are horrible. They stop me hearing the content I want to hear. Hence personally, I disapprove, and feel very negative towards ads on podcasts. So brands that are spending money on these ads, to damage their brands, in my opinion - that is terrible business.

A really bad example is Dan Snow, who makes lovely interesting history podcasts. History is one of my lifelong passions. But he starts every podcast on Android playstore (nothing to do with Audioboom, I know), with sickeningly cringeworthy ads for whatever he’s been paid to promote. That posh, cultured voice, imploring me to buy some crappy product, just destroys his credibility. I would never do that.

You just never promote anything, if you want to be taken seriously as an independent voice. Also, Dan talks as if through clenched teeth, and the ads take ages, they go on & on. So disingenuous, when he tries to sound imploring about some rubbish software product that he’s being paid to lie about. Don’t sell out Dan Snow! I understand that he wants to make a bob or two, but at what a terrible cost - that I don’t trust anything he says.

People have offered to bribe me occasionally before - I recall some awful man offered me £30k per year, to promote his shitty resource stocks about 18 years ago! I narrowed my eyes, and just laughed. Never heard from him again, and he's probably dead now anyway, so it doesn’t matter.

How did we get onto this? Oh yes, ads in podcasts. Is Audioboom on the cusp of greatness? Things seem to have improved a lot, the latest updates seem good. On balance, I don’t know what is likely to happen, so will watch from the sidelines.

Good luck to holders! It’s been a cracking speculative gain in recent times - don’t forget to top slice some profits though, as boom can quickly turn to bust, as Mr Market has showed us recently with some bizarre zigzag price movements. We'll keep an eye on things here at the SCVR, but we're not gambling here, we're trying to find good risk:reward situations. At the moment BOOM sits in the "unknown" segment, so let's see what happens!

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Ultra Electronics Holdings (LON:ULE)

Takeover approach - more of a mid cap, with a market cap of £1.8bn at last night's close. It's up by a third today, to 3303p, on news of a possible cash offer from Cobham, of £35 per share, plus the 16.2p dividend already announced.

This follows an earlier approach of £28 per share.

Having considered the Proposal, the Board has indicated to Cobham that it is at a value the Board would be minded to recommend to Ultra shareholders...

According to Wikipedia, Cobham is an international aerospace group, which was bought by private equity for £4bn in Jn 2020. It's a big local employer in Wimborne Minster, Dorset, where it had a sprawling site along the River Stour, where I used to walk my dog (I won't name her, as that could compromise my passwords to many websites) in the 1980s, and we got attacked regularly by beef cattle in the field further down (vicious, methane producing things, best avoided).

As we've discussed here before, there seems to be a deluge of takeover bids going on. Private equity seems to value some companies significantly higher than the public market does. That's very bullish.

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Oh by the way, apologies for some nonsense that appeared in the comments below, I've asked Stocko HQ to delete everything nonsensical. I think a combination of working too late, suspected heatstroke, and doing essential research on Virgin Wines Uk (LON:VINO) created a perfect storm. 15 bottles of wine turned up yesterday afternoon, and 2 of them seem to have mysteriously disappeared. Sorry about that.

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How to deal with disagreements?

A couple of situations recently have made me think, so thought I would share this with you.

Women are so much better at resolving disputes

Example 1 - a woman emailed me recently, saying politely that my comments on Parsley Box (LON:MEAL) had upset her. She described my comments as "clumsy", and explained how they brought a tear to her eye. She sends MEAL products to her terminally ill father. When she explained everything, I immediately felt sorry, and edited the SCVR accordingly, with a personal reply and apology. In the speed of the moment, I had not phrased things well. She replied positively, and thanked me for listening and editing the article.

Example 2 - men generally - get aggressive, and vent their spleen. Usually using completely invented nonsense. Everything they say is made up, and they're furious. Sounds familiar?! Total idiots. that's it really. See the comments here for good examples, from time to time.

Conclusion - we need more women in investing.

Best wishes, Paul.